Hon Hai chairman and founder Terry Gou, looking to further tap Sharp's expertise to produce more panels for Apple Inc's iPhones and consumer electronics, is discussing a deal that would make his firm the biggest shareholder of century-old Sharp with at least a 9.9 percent stake.

"Our alliance with Sharp will raise our profile and help us as a supplier to Apple," Tai Jen Wu, an executive at Hon Hai, told reporters in Sakai, near the city of Osaka, following a visit by Gou to an advanced LCD panel factory that he jointly owns with Sharp.

Gou has said that whether he makes the investment depends on the Japanese firm's willingness to heed his advice on how to restore profits.

Improving Sharp's profits is a focus of the discussions, said the Hon Hai executive Tai, who was left to deal with a crowd of reporters after Gou ducked out of a planned media conference for an unspecified appointment.

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 last business year. But helped by recent orders won by Hon Hai, production at the plant has surged, according to sources.

Hon Hai and Sharp may announce details of that investment as early as Friday.

The Taiwanese company agreed to pay 67 billion yen ($854 million), or 550 yen a share, for a 9.9 percent stake in March, but reopened talks in August to seek a lower price after the LCD TV pioneer's stock slumped to below 200 yen as mounting losses raised a question mark over its future. Sharp's shares closed almost 7 percent higher on Wednesday at 230 yen.

Hon Hai is expected to report this week a second-quarter net profit of T$10.03 billion ($334 million), according to the median estimate of 11 analysts by Thomson Reuters I/B/E/S, well below T$12.9 billion a year earlier and down sharply from T$14.92 billion in the first quarter.

The Taiwanese company has spent heavily on improving working conditions at its plants in China and hiking wages, resulting in a drop in operating margins.

Its shares closed 1.79 percent higher on Thursday in a broader market that fell 0.27 percent.

REHABILITATION

Hon Hai, which Gou started four decades ago as a plastic parts maker, is hoping to get the technological know-how of Japan's leading panel maker to improve operating margins and boost its supply of panels to Apple.

For Sharp, the Japanese firm needs backup from Hon Hai to remain viable in the long term, say investors.

"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 reporters awaiting his appearance.

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.

"They depend very much on Hon Hai," said Yuuki Sakurai, CEO of Fukoku Capital Management, an investment arm of Fukoku Mutual Life Insurance. "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."

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 South Korean rivals Samsung Electronics and LG Electronics.

Combined, Japan's big three expect to sell 10 million fewer TVs in the year to March 31 than in the previous 12 months. Sharp is feeling the pain of that more keenly than its domestic peers because with fewer non-TV related businesses to fall back on, it has less scope to retool.

HON HAI LIFT

A Hon Hai lift is already being felt at the Sakai LCD plant, of which Gou owns 38 percent stake, putting his control of the facility on par with Sharp.

The factory produces 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.

Output at Sakai jumped to 80 percent in August, helped by orders from Sony and U.S. TV maker Vizio won by Hon Hai, sources familiar with the orders told Reuters last week.

While Gou and Sharp have indicated that Hon Hai's stake in the Japanese company will not rise above the 9.9 percent agreed in March, Sharp's need for cash has nonetheless given Gou, a billionaire who owns a castle in Europe, a chance to carve out a bigger slice of Sharp.

The Japanese company, which takes its name from the ever-sharp mechanical pencil it invented a century ago, is considering selling TV plants in Mexico and China to Hon Hai as part of what could be a tighter partnership deal.

As the major shareholder in Sharp, which also builds screens for Apple's iPhone and iPad, Hon Hai will be concerned about the performance of the Japanese firm's other units, including its money-losing solar-panel business, profitable appliance division and printer unit.

Sharp so far 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 in Osaka, and Jonathan Standing and Faith Hung in Taipei; Editing by Linda Sieg and Ryan Woo)

• A Permanent Economic Emergency