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Saturday, Sep. 1, 2012
Sharp's fate in limbo amid stalemate with Hon Hai
Concerns over the outlook for struggling Sharp Corp. are deepening amid the uncertainty over its capital tieup deal with Taiwanese partner Hon Hai Precision Industry Group.
Hon Hai, better known as Foxconn, had hoped to conclude a deal with the electronics giant by the end of August, but founder and Chairman Terry Gou reportedly left for Taiwan late Thursday following negotiations in Japan without finalizing a settlement.
Analysts said that until the final deal is struck on the tieup, it will not only remain unclear when and how much cash the ailing manufacturer can raise, but also overshadow the prospect of Sharp being granted hundreds of billions of yen in additional loans from its main creditor banks — Mizuho Corporate Bank and Bank of Tokyo Mitsubishi UFJ — to reduce its massive debt burden.
"The longer (the negotiations) take, the muddier the outlook for the bank loans becomes," said Takashi Hirai, a senior partner at consulting firm Roland Berger Ltd.
Growing fears over Sharp's financial health are already affecting its share price. On Friday, the company's stock ended at ¥198 on the Tokyo Stock Exchange, a decline of 12.8 percent. Its shares briefly tumbled to a low of ¥164 Aug. 15.
In a related move Friday, Standard & Poor's cut its credit rating on Sharp to "noninvestment," slashing it by two notches to BB+ and issuing a warning over the firm's anemic cash flow and deteriorating market conditions.
Many analysts are warning that Sharp's lack of readily available cash as well as weakening credibility may make it difficult to repay its short-term debts or refinance them.
The company owed around ¥700 billion as of June 30, a steep rise from its ¥600 billion short-term debt at the end of March. Sharp will additionally have to redeem ¥200 billion worth of corporate bonds next September.
In terms of cash flow, the major manufacturer of LCD panels had only ¥200 billion on its books as of the end of June.
Since Sharp's share price has plummeted to just one-third of what it was when it reached the deal in principle with Hon Hai in March, the focus of this week's negotiations was firmly on the greater stake the Taiwanese company is now seeking to acquire, and its price.
In March, Hon Hai agreed to purchase a 9.9 percent stake in Sharp for ¥67 billion at ¥550 per share, but it is now trying to renegotiate these terms.
In a desperate bid to reduce its mountain of debt, Sharp has pledged to slash it by some ¥400 billion by the end of March 2013.
"However, there is some uncertainty about Sharp's ability to achieve this target, given the generally weak operating environment and the company's weak earnings and cash flow recently," Yoshio Takahashi, an analyst at Moody's Investors Service in Hong Kong, said in a recent report.
Sharp also plans to lay off some 5,000 workers, its first job cuts in more than 60 years. At the same time, however, the outlook for Sharp's core business remains bleak, according to analysts.
Moody's expects the company's business to remain under pressure due to losses incurred in its LCD televisions and large LCD panels divisions, as well as weaker profits from its small and medium-size LCD panel operations.
Just like its domestic rivals, Sharp has suffered amid the high yen and aggressive competition from overseas rivals, such as South Korea's Samsung Electronics and LG Electronics.
Demand has also remained severely weak. According to the Japan Electronics and Information Technology Industries Association, domestic shipments of flat-screen TVs plunged by more than 70 percent from January to July compared with a year earlier, down to just 3,869 units.
Sharp logged a ¥138.4 billion net loss in the April to June quarter, more than doubling the ¥49.2 billion loss it posted a year earlier.
Still, analysts say they expect the negotiations with Hon Hai to continue, although it may take some time to strike a deal.
"Both companies need to tie up with each other and continue the negotiations," said Hirai of Roland Berger, explaining that Hon Hai requires Sharp's expertise to manufacture iPhones for Apple Inc., while Sharp needs to reduce its inventory through the Taiwanese firm's distribution channels.