TOKYO Banks are hammering out a refinancing plan for embattled Sharp Corp (6753.T) without waiting for Hon Hai Precision Industry Co Ltd (2317.TW) to lend a helping hand through a stalled equity investment, sources at the lenders said.
A floor under its finances would ease the pressure on Sharp to accept an agreement that would make Hon Hai its largest shareholder and give it a say in its management. The pressure will now come from banks eager to see the century-old Japanese firm return to profit through deep cost cuts and improved productivity.
Mizuho Financial Group Inc (8411.T) and Mitsubishi UFJ Financial Group Inc (8306.T) are aiming to arrange financing of as much as 300 billion yen ($3.8 billion) for Sharp by as early as September 20 in return for cost-cutting pledges and asset sales, two sources told Reuters on condition they were not identified.
The plan, which will not cover a 200 billion-yen convertible bond that matures in September next year, will go ahead with or without capital injection from Hon Hai, they said.
Shares in Sharp, which fell as much as 6 percent in early trading, ended 3 percent higher at 206 yen after the Reuters report.
For Sharp managers, the best agreement with Hon Hai is a "partnership with no operations control," said Jeff Loff, an analyst at Macquarie Capital Securities in Tokyo.
In addition to fixing its loss-making TV unit, Loff said, Sharp will have to raise the profitability of its small LCD panel business, which fabricates displays for smartphones and tablet PCs, including the latest iPhone that Apple is expected to unveil on September 12.
Sharp can weather losing Hon Hai's expected investment, Chief Financial Officer Tetsuo Onishi said at a press briefing in Osaka on Friday. The Japanese firm "can come up with a contingency plan," he said, without giving details.
Sharp said on Thursday that it had mortgaged nearly all of its domestic offices and factories, including one which makes screens for Apple Inc's (AAPL.O) iPhones in order to quickly secure fresh loans of up to 150 billion yen.
Sharp and Hon Hai had been expected to conclude an agreement for the Taiwanese company to buy a 9.9 percent stake in the maker of Aquos TVs at the end of a trip by Hon Hai chairman, Terry Gou, to Japan a week ago.
His abrupt return to Taiwan a day early scuttled that plan, leaving disappointed Sharp executives trying to arrange a meeting with Gou in Taipei.
Gou, who already jointly owns a TV display plant in Japan with Sharp, has since said he wants a say in Sharp's management in return for Hon Hai's cash.
"I don't think we have a deadline," a spokesman for Hon Hai said, when asked when the company was aiming to wrap up an agreement with Sharp.
Sharp's Onishi, said last week that his company would prefer to leave discussion on further cooperation in small LCD displays, mobile phones and other areas until later as it scrambles for cash to pay as much as 360 billion yen in short-term commercial paper.
Although more difficult than initially expected, a pact between the two suppliers would help both companies prosper in the longer term, analysts say.
Hon Hai gets access to Sharp's technology and a steady supply of displays to build Apple's iPads and iPhones, while the Japanese maker gains a partner with the know-how to control costs and benefits from a network of new customers.
A fund manager said Hon Hai may not suffer any short-term damage should the deal collapse, though its strategy may have to change in the longer run without Sharp in the picture.
"Terry Gou's strategy is to ally with Japanese companies against Korean ones. It needs Sharp to achieve that goal," said Alex Hu, the head of propriety trading of Mega Securities Co Ltd, which owns Hon Hai shares.
Failure of the deal could affect Hon Hai's ability to get any possible orders for Apple's much rumored iTV next year, Hu said.
Sharp's president Takashi Okuda and Gou have yet to fix their next meeting, Onishi told reporters on Friday.
"If the timing works we would like to set a meeting between the two in Japan or Taiwan," he said.
Hon Hai shares closed 0.68 percent higher on Friday in a broader market gain of 1.34 percent. ($1 = 78.97 Japanese yen)
(Additional reporting by Taro Fuse and Yoshiyuki Osada in TOKYO and Faith Hung in TAIPEI; Writing by Tim Kelly; Editing by Ryan Woo)