Foxconn's 4-year pursuit of Sharp stumbles near final hurdle

Pedestrians walk before the headquarters of Japan's electronics company Sharp in Osaka, on Feb 25, 2016.
Pedestrians walk before the headquarters of Japan's electronics company Sharp in Osaka, on Feb 25, 2016. PHOTO: AFP

TOKYO (BLOOMBERG) - Billionaire Terry Gou has been chasing Sharp Corp since at least 2012 and just when it looked like Foxconn Technology Group had secured its prize, he hit the pause button.

Foxconn learned this week about liabilities at Sharp that could exceed 300 billion yen (S$3.73 billion) under certain circumstances, prompting Gou to delay signing a final agreement for control of the struggling company, according to people familiar with the matter. Triggered by events such as restructuring or layoffs, they could also be much lower, the people said, asking not to be identified because the matter is private.

That delay came just hours after Sharp outlined plans to sell new stock to Foxconn in a move that would deliver a majority stake to the assembler of Apple's iPhones and iPads.

While Mr Gou out-maneuvered and outbid state-owned Innovation Network Corp of Japan to get the backing of Sharp's board for his bailout, the potential costs of restructuring a company that has endured chronic losses prompted second thoughts.

"It's odd that after chasing a company for four years you wouldn't do your due diligence and find out about off-balance sheet contingent liabilities far ahead of striking a final agreement," said Alberto Moel, an analyst at Sanford C Bernstein & Co.

Shares of Sharp slumped 15 per cent on Friday (Feb 26), after falling 14 per cent on Thursday.

Under a plan announced by Sharp, Foxconn would get control over the company by spending 484.3 billion yen to buy additional shares at a discount and give Gou's empire 65.9 per cent of the Japanese company.

Foxconn put out a one-paragraph statement late Thursday after Sharp disclosed the terms.

It read in its entirety: "We acknowledge receipt of a notice today from Sharp's board choosing us as their preferred partner. After receiving new material information from Sharp yesterday morning, we have accordingly informed Sharp last night (before their board meeting on 2/25) that we will have to postpone any signing of a definitive agreement until we have arrived at a satisfactory understanding and resolution of the situation."

Foxconn declined to comment on any potential liabilities, citing a non-disclosure agreement with the Osaka-based company. Sharp has properly disclosed all contingent liabilities and sees no need for further disclosures as it continues to cooperate with Foxconn toward the final agreement, the Japanese company said in a statement on Friday.

"There is no obligation under Japanese accounting rules to disclose contingent liabilities," said Hideki Yasuda, an analyst at the Ace Research Institute in Tokyo. "The fact that Sharp didn't have to set aside money for this suggests that the probability is low and more of a latent risk."

As part of the deal announced by Sharp, Foxconn would buy 100 billion yen of preferred shares owned by Mizuho Financial Group and Mitsubishi UFJ Financial Group, or half of each bank's holdings.

Mr Gou is seeking to broaden Foxconn's remit, transforming it into a company that also makes key electronics components and devices. Foxconn had proposed a total rescue plan worth about 660 billion yen, a person familiar said previously.

He announced plans to invest in Sharp in 2012 and buy shares at 550 yen a piece, a deal that was never consummated as the maker of Aquos TVs posted record losses and its stock tanked. This week's deal involved buying shares at 118 yen each.

Sharp would remain an independent company and keep the brand under new ownership, it said in a statement. The Japanese company, which pledged to maintain employment levels, would work with Foxconn on next-generation high-end flexible displays for smartphones and other devices.