With 200 billion yen ($2.5 billion) of convertible bonds maturing in 2013, Sharp may have to ask the state Enterprise Turnaround Initiative Corp. or Innovation Network Corp. of Japan for money, said Fumiaki Sato, co-founder of Sangyo Sosei Advisory Inc., a turnaround advisory firm in Tokyo. Sharp has failed to win a planned 67 billion-yen equity investment from billionaire Terry Gou’s Foxconn Technology Group.
Sharp hemorrhaged 103 billion yen in cash from operations in the first half of the year as Japan’s electronics industry struggles with dwindling demand and competition from Samsung Electronics Co. A bailout may follow the precedent set by the government rescue of Japan Airlines Corp. two years ago that wiped out shareholders while keeping planes in the air.
“Japan has no other option but to help companies that need a bailout, given the possible impact to the economy,” said Yuuki Sakurai, president of Fukoku Capital Management Inc. in Tokyo. “If Sharp fails, there will be a lot of job losses, including those at suppliers, and the impact of that can’t be ignored.”
Sharp fell 6.7 percent in Tokyo trading, its biggest drop since Oct. 9, to 154 yen. The Osaka, Japan-based company has declined 77 percent this year, the worst performer among more than 1,600 stocks in the MSCI World (MXWO) Index.
The government-backed fund ETIC injected 350 billion yen into bankrupt Japan Air, which filed for bankruptcy with 2.32 trillion yen in liabilities. INCJ is said to be in discussions to purchase microcontroller maker Renesas Electronics Corp.
Faced with falling demand for TVs and a record yen that erodes the repatriated value of overseas sales, Sony Corp., Panasonic Corp. and Sharp plunged to record losses last year. After failing to come up with hit products to challenge Samsung and Apple Inc., the Japanese consumer-electronics companies have resorted to closing factories, firing workers and cutting costs to revive.
Sharp warned on Nov. 1 it may post a record 450 billion-yen loss in the year ending March 31, following last year’s 376 billion-yen loss. Japan’s largest maker of liquid-crystal displays said there was “material doubt” about its ability to survive.
The losses drove down its equity-capital ratio as of Sept. 30 to 10.3 percent, less than a third of what it was a year ago.
“Sharp needs to boost up capital as it cannot generate profit from its businesses,” said Yasuo Nakane, an analyst with Deutsche Securities Inc. in Tokyo. “There aren’t many more assets that can be provided for bank loans, and the company cannot sell bonds. A public offering is unrealistic given its share price.”
Interest-bearing debts swelled to a record high 1.2 trillion yen as of Sept. 30, the company said in a Nov. 1 statement. Earlier this year, Sharp won 360 billion yen of loans from banks after earlier pledging its stake in Pioneer Corp., its headquarters and some factories as collateral.
“We’ve cleared concerns over our funding in the immediate future by getting syndicated lending,” said Miyuki Nakayama, a spokeswoman for Sharp. “Our two main banks have also made clear their willingness to support us. We’ll continue making efforts to improve our financing situation.”
Spokespeople at Enterprise Turnaround, also known as ETIC, and Innovation Network, also known as INCJ, both declined to comment. They declined to disclose their names, citing company policies.
Some lawmakers in Japan say Sharp may not warrant being rescued.
“It would only be proper to use public funds for a corporate bailout if there was a very thorough explanation for it,” Masahiko Shibayama, a Liberal Democratic Party legislator in the Lower House, said in a Nov. 2 interview. “I’m cautious because of the precedent it might set.”
Sharp, whose customers include Apple and Boeing Co., had 55,216 employees as of Sept. 30.
In March, the company signed an agreement to sell a 9.9 percent stake to Taipei-based Foxconn at 550 yen a share. The two companies are renegotiating the deal after Sharp’s shares plunged. Standard & Poor’s lowered Sharp’s rating today to B+ with negative implications, three days after Fitch Ratings cut the company to junk.
“Fitch does not foresee any meaningful operational turnaround in the company’s core business over the short- to medium-term,” the ratings company said.
The government started ETIC in 2009 to revitalize the nation’s economy by providing support for local businesses. ETIC invested in JAL after the carrier filed the nation’s biggest bankruptcy of a non-financial company.
JAL returned to the stock market Sept. 19 in a 663 billion- yen public offering after a two-year turnaround that transformed it into the world’s most-profitable airline. The deal brought the state-backed fund about 300 billion yen in cash that was given to the government.
INCJ started in 2010 with almost 900 billion yen of financial support from the government and 19 private corporations under a goal to spur economic growth by promoting consolidation and nurturing new businesses.
Renesas Electronics Corp., the world’s largest maker of microcontrollers, may be acquired for about 200 billion yen by a group led by INCJ as early as in November, two people familiar with the matter said Oct. 15.
Some companies that needed bailouts found other means to raise money. Elpida Memory Inc., the Japanese chipmaker that filed for bankruptcy in February, won a bid in July from Micron Technology Inc., which proposed a transaction valued at 200 billion yen.
Given the deterioration in the electronics industry, even a government bailout may not return the company to viability, according to Hideki Yasuda, an analyst at Ace Securities Co. in Tokyo.
“Burdened with high debts, getting some investment from a state-backed fund or a private company may be meaningless,” Yasuda said. “There are still possibilities for bankruptcy because it takes so much money to bail out Sharp.