Foxconn Technology Group, maker of Apple Inc. (AAPL:US) iPads, plans to renegotiate the price of its investment in Sharp Corp. (6753) after the Japanese TV maker widened its loss forecast and the shares fell the most since 1974.
“We plan to discuss the investment again, but for sure it won’t be at the original 550 yen-per-share,” Simon Hsing, a spokesman for Hon Hai Precision Industry Co. (2317), the Taipei-based flagship of Foxconn, said by phone today. “Sharp has agreed to us taking at least the same size of stake, with the possibility of an even larger stake.”
Hon Hai, the world’s largest contract manufacturer of electronics, intends to continue with the investment, Hsing said. Foxconn group companies will no longer recognize the NT$6.4 billion ($214 million) write-off they made last quarter because of Sharp’s share price decline, Hsing said. Miyuki Nakayama, a spokeswoman for Sharp, said the company hasn’t been approached by Hon Hai about renegotiating the terms.
Taiwan billionaire Terry Gou and his group agreed in March to invest 133 billion yen ($1.7 billion) to rescue Sharp, the Osaka-based company that reported a 138 billion-yen quarterly loss yesterday. The investment in Japan’s biggest liquid-crystal display maker may help Foxconn guarantee access to technology for panels used in mobile phones and TVs.
Sharp shares plunged 28 percent to 192 yen in Tokyo trading today after forecasting an annual loss of 250 billion yen. That’s more than its market capitalization of 213 billion yen after the stock’s biggest slump in more than three decades.
The decline could prompt Hon Hai to write off NT$6.1 billion and Foxconn Technology Co. NT$3.1 billion this quarter, based on the original investment plan, according to estimates by Vincent Chen, an analyst at Yuanta Securities Co. in Taipei.
Sharp’s convertible bonds due September 2013 dropped to 87 percent of the notes’ face value.
“It’s disastrous for Sharp,” said Amir Anvarzadeh, Singapore-based manager for Asia equity sales at BGC. “Hon Hai has to increase its stake in Sharp to keep it alive. Or they could turn around and write it off.”
There’s no fixed timeline for when a new price will be agreed, and the original transaction has not been completed, Hsing said. Foxconn intends to proceed with its technology cooperation and taking an equity stake, he said.
Foxconn, a maker of computer casings, and its affiliates agreed to buy a 9.9 stake in Sharp. Gou invested 66 billion yen for a 37.6 percent stake in Sakai Display Products Corp., formerly known as Sharp Display and using the LCD industry’s most advanced technology.
Last month, the cost to insure Sharp’s debt against default in the short term outstripped that for the longer term for the first time, a signal investors have concerns about the company’s ability to repay debt.
The two-year contracts on Japan’s largest maker of liquid- crystal displays jumped 453.7 basis points since June to 941.9 basis points, while the five-year cost rose 295 to 897.7, according to CMA prices as of Aug. 2.
Sharp had a net loss of 138.4 billion yen in the three months ended June 30, widening from 49.3 billion yen a year earlier, the Osaka-based company said. The average of four analysts’ estimates compiled by Bloomberg was a loss of 76 billion yen.
The extra yield investors demand to own convertible bonds instead of government debt soared 489.4 basis points to a record 1,243.6 basis points, prices from the Tokyo Stock Exchange at 10:11 a.m. show.
Sharp has asked its lenders for a “back-up structure” to help the company raise long-term funds, Tetsuo Onishi, the senior managing director in charge of accounting, told reporters in Tokyo.
Sharp has 2 billion yen of bonds maturing later this month and about 200 billion yen of convertible bonds maturing in September 2013, according to data compiled by Bloomberg.
The prediction for further losses contrasts with Sony Corp. (6758)’s forecast of profit and Panasonic Corp. (6752)’s return to profit. Sony, the maker of Bravia TVs and PlayStation game machines reeling from four consecutive years of losses, reduced its full-year forecasts for net income, operating profit and sales yesterday, citing the slowing global economy and a stronger yen eroding its overseas earnings.
“I can’t be bullish on the Japanese consumer electronics makers,” said Ichiro Takamatsu, a fund manager at Tokyo-based Bayview Asset Management Co., which manages $2 billion. “I don’t see any promising products enough to spur their sales.”
Samsung Electronics Co. (005930), the world’s biggest TV maker, said last month that net income in the quarter ended June was 5.19 trillion won ($4.6 billion).
Sharp, which also makes solar cells, said it will implement its first workforce reduction since 1950. Restructuring expense drove the company to forecast a net loss eight times greater than its own projection of a 30 billion-yen loss three months ago. The loss outlook compares with the average 65.3 billion-yen loss estimate of 16 analysts compiled by Bloomberg.
“We’re in a situation where we can’t avoid taking job cuts and I’m torn up inside,” said Takashi Okuda, who became Sharp’s president in April. “Fixed costs weigh really heavy when sales are falling.”
Sharp’s bigger rivals, Sony and Panasonic, are already restructuring and shedding jobs.
Sony, which unveiled a plan in April to reduce 10,000 jobs this fiscal year, reduced its staffing at marketing units in developed countries and at its headquarters in the quarter ended June 30, spokesman Shiro Kambe said yesterday. Osaka-based Panasonic reduced 36,000 jobs in the year ended March 31.
Sharp promoted Okuda, 58, to replace Mikio Katayama, who became chairman, after predicting the worst loss in its 100-year history amid slumping demand.
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