By Engen Tham and Ilona Wissenbach (Reuters) -Foxconn's two-year pursuit of a stake in a unit of German auto supplier ZF Group stalled last month due to a substantial mismatch in valuation expectations and a higher-than-estimated debt pile, according to documents seen by Reuters. The findings from the Taiwanese firm's due diligence were circulated days before ZF Group said in October that it would abandon its plans to spin off its powertrain technology unit, known as Division E. The unit produces electric, conventional and hybrid systems for the automobile sector. Foxconn was considering buying a stake in it as part of its expansion in the electric vehicle (EV) business. Now, ZF Group is in talks with Foxconn and other interested parties about partnerships covering specific products in Division E, according to a person at ZF with direct knowledge of the matter. He could not be named as he is not authorised to speak to the media. The due diligence findings, the September stalling of the deal and ZF Group's new plans with Foxconn are being reported for the first time. Foxconn's plans stalled after due diligence estimated Division E's value at 1.5 billion euros ($1.7 billion) to 2.5 billion euros, lower than a previous estimate of 3.5 billion euros, according to a document prepared by JPMorgan for Foxconn as its deal advisor. The equity value of Division E, more importantly, was found to be negative after due diligence was completed, versus an earlier estimate of 1.3 billion euros, according to the September document titled "Project Verde – Discussion Materials." A comment written on the margin of the financial findings in the document said: "no deal if equity value is negative." The due diligence findings and the stalling of the deal are likely to cast a pall over Foxconn's ambition to expand in EVs, which the company believes is a major generator of growth in the future. Foxconn, the world's largest contract electronics maker, and ZF Group did not respond to requests for comment. JPMorgan declined to comment. EV EXPANSION Foxconn and ZF Group had been in discussions about the Taiwanese company buying a stake in Division E by paying 1.3 billion euros if its equity valuation hit 2.6 billion euros, according to a ZF document dated February 19, 2025. At the time, the two companies had also explored a joint venture structure, according to the ZF document. Earlier this month, ZF Group said it would cut around a quarter of Division E's workforce by 2030 under a restructuring deal reached with its works council and labour union IG Metall. ZF Group has a high debt burden from past acquisitions and Foxconn's due diligence showed that Division E's net debt was nearly 90% higher than expected at 4.177 billion euros, according to the JPMorgan document. A significant part of the revised debt figure was attributable to 944.7 million euros of additional pension liabilities, the document showed. Foxconn's pursuit of a stake in the unit came as the global EV industry has grown rapidly in recent years, driven by government incentives, tightening emissions regulations and rising consumer demand for cleaner transportation. Automakers around the world have invested billions in ramping up EV production, but the sector faces headwinds from supply chain disruptions, fluctuating raw material costs and uneven demand across markets. Foxconn, formally known as Hon Hai Precision Industry, has faced its own challenges in expanding its EV footprint. Efforts that have soured include a venture to make electric pick-up trucks in the U.S. In addition, a joint venture with China's Geely to provide contract manufacturing for automakers has not made progress. Still, Foxconn continues to seek opportunities in the automotive sector, particularly in Japan. In May, Japanese automaker Mitsubishi Motors and Foxconn subsidiary Foxtron Vehicle Technologies signed a memorandum of understanding for the supply of an electric-vehicle model. It was expected to be developed by Foxtron, manufactured in Taiwan by Yulon Motor and launched in Oceania in the second half of 2026. In July, Foxconn said it struck a deal to sell a former car factory in Lordstown, Ohio, that it purchased in 2022 to manufacture EVs. And in August, Mitsubishi Fuso Truck and Bus Corporation and Foxconn also signed a memorandum of understanding to collaborate on zero-emission buses. Last year, Foxconn acquired 50% of the shares in ZF Chassis Modules, a maker of chassis systems for passenger cars, according to a news release posted on ZF Group's website. The 1 billion euro deal "opens up new perspectives in the automotive sector," it said. ($1 = 0.8535 euros) (Reporting by Ilona Wissenbach in Frankfurt and Engen Tham; Additional reporting by Wen-Yee Lee in Taipei; Editing by Sumeet Chatterjee and Thomas Derpinghaus)
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