(Reuters) – Hon Hai Precision Industry and Sharp Corp may spend over $1 billion to boost capacity at the world’s most advanced LCD panel factory in western Japan, part of an effort to rescue century-old Sharp from the wreck of Japan’s sinking TV industry.
The two will also use Hon Hai’s procurement muscle to help Sharp cut costs, C.C. Lin, Hon Hai’s most senior official in charge of the plant in Sakai, near Osaka, told reporters after a visit by Hon Hai Chairman Terry Gou.
Gou, seeking to further tap Sharp’s expertise to make more display panels for Apple Inc’s iPhones and consumer electronics, is discussing a deal that would make Hon Hai the biggest shareholder of Sharp with at least a 9.9 percent stake. The firms may announce details of that investment as early as Friday.
Hon Hai is also considering buying Sharp’s TV assembly plants in China and Mexico, and Hon Hai may list the Sakai plant on Taiwan’s stock exchange in two or three years, Lin said.
Gou has said that whether he takes a stake in Sharp will depend on the Japanese firm’s willingness to heed his advice on how to restore profits.
“We can lower a lot of costs at Sharp such as in component procurement. We buy a lot of things,” Lin said.
“TREAT THE DISEASE”
Feeble demand that left the $4 billion factory operating well below capacity forced Sharp, the maker of Aquos LCD TVs, to post its worst ever annual loss in the last business year.
But helped by recent orders won by Hon Hai from Sony and U.S. TV maker Vizio, production at the plant has surged, according to sources. Lin said output at Sakai was expected to exceed 80 percent of capacity by the year’s end.
The Taiwanese company agreed to pay 67 billion yen ($854 million), or 550 yen a share, for 9.9 percent of Sharp in March, but reopened talks in August to seek a lower price after the LCD TV pioneer’s stock slumped below 200 yen while mounting losses put a question mark over its future. Sharp’s shares have managed to bounce by more than one-third in the past two weeks to 227 yen from their lowest level in more than three decades.
Sharp, which takes its name from the ever-sharp mechanical pencil it invented a century ago, needs backup from Hon Hai, which Gou started four decades ago as a plastic parts maker, if it is to remain viable in the long term, investors say.
“There’s lots of room for Terry Gou to help improve Sharp, though it will be difficult and it will take a long time,” said Oscar Chung, fund manager at Taiwan’s Capital Securities Investment Trust, which owns Hon Hai shares.
“The components Sharp buys are expensive because they are made by Japanese companies. This is a major area Hon Hai can work on with Sharp.”
The mercurial Gou, who has been mobbed by the media since his arrival in Japan, and staider Sharp executives may face a bit of a culture clash as ties between the companies grow.
On Thursday, Gou scrapped plans for a ceremony ahead of the factory tour. He then skipped an expected media briefing, sparking an uproar among the more than 100 waiting reporters.
HON HAI LIFT
For now, Sharp is relying on hundreds of billions of yen of fresh loans from its main banks, Mizuho Financial Group and Mitsubishi UFJ Financial Group, to pay its debts over the next year.
“The role of the banks is to treat the disease, but the role of Hon Hai is to get it out of bed and running,” said Yuuki Sakurai, CEO of Fukoku Capital Management.
Sharp and other Japanese TV makers Sony Corp and Panasonic Corp, which ruled the global TV market in the 1980s and 1990s, have been battered by aggressive Korean rivals Samsung Electronics and LG Electronics.
A Hon Hai lift is already being felt at the Sakai LCD plant, of which Gou owns 38 percent.
The factory makes credit card-thin panels of liquid crystal sandwiched between sheets of glass wider and longer than king-sized beds that are cut up to make TV screens.
With output running at levels as low as 30 percent of capacity, the factory was responsible for much of the net loss of 376 billion yen that Sharp posted in the last business year.
Gou and Sharp have indicated Hon Hai’s stake will not exceed 9.9 percent, but Sharp’s need for cash has given Gou, a billionaire who owns a castle in Europe, a chance to carve out a bigger slice with the possible purchases of the Mexican and China TV plants.
As the major shareholder in Sharp, which also builds screens for Apple’s iPhone and iPad, Hon Hai will scrutinize the performance of its other units, including a money-losing solar-panel business, a profitable appliance division and a printer unit.
Sharp has said that to return to health, it will lay off 5,000 workers, its first redundancies in more than 60 years. It may have to cut more, analysts say, if pressure from Gou adds to a similar push from lenders to do more to turn itself around.
($1 = 78.6750 Japanese yen)
(Additional reporting by James Topham in Tokyo, Reiji Murai and Kenichi Kawakami in Osaka, and Jonathan Standing and Faith Hung in Taipei; Editing by Linda Sieg, Ryan Woo and Edmund Klamann)