Sharp Faces Dwindling Financing Options
By DAISUKE WAKABAYASHI and ATSUKO FUKASE The Wall Street Journal - Tuesday March 26, 2013
TOKYO—Japan's Sharp Corp. 6753.TO -1.69% is trying to find new sources of capital ahead of key looming financing deadlines. But the electronics maker's options have shrunk, as management has told potential funders it doesn't want to relinquish control of key decisions, while rebuffing demands from creditors that it shed core assets.
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Complicating Sharp's attempts to survive increasingly dire finances, two former presidents have joined current President Takashi Okuda in seeking to negotiate deals with different sets of possible investors, creating confusion among creditors and potential investors about who is in charge at a critical moment.
"It's not clear who is at the helm," said an official at one of Sharp's lenders. "The company's governance is not functioning as it should."
Sharp spokeswoman Miyuki Nakayama countered: "Our president is clearly in charge. He carries the title of representative director and he is involved in all decision-making."
Sharp—known for its mobile phones and Aquos liquid-crystal-display television sets—has received some important lifelines in recent months, striking deals with Samsung Electronics Co. 005930.SE +0.94% and Qualcomm Inc. QCOM +1.45% for minor stakes each worth about ¥10 billion, or $106 million.
But with a credit line expiring in June and a bond redemption due in September, Sharp still needs to raise significantly more money to bolster its debt-saddled balance sheet, according to people familiar with the company's situation. The bulk of its needed capital will likely come from a new share issuance—possibly this summer—these people said, but they added that a further investor is important for building confidence for a broader equity issuance.
Sharp President Takashi Okuda, in Tokyo last month, took over in June.
One of the few options open to Sharp, according to people familiar with the situation, is taking a deal from private-equity funds with tougher requirements than industry peers. The people declined to say whether Sharp is currently engaged in talks with specific funds. Sharp said it continues to consider various options for its finances.
One potential source of capital that had appeared promising is likely to officially dry up this week, when the deadline to renegotiate an earlier equity investment from Taiwan's Hon Hai Precision Industry Co. 2317.TW +1.33% passes on Tuesday. Commonly known as Foxconn, Hon Hai had originally pledged ¥66.9 billion to Sharp last March. But that deal fell apart in August when the Taiwanese company issued a statement saying Sharp agreed that Hon Hai didn't need to honor the original agreement.
Sharp said it never released Hon Hai from the original agreement, but it agreed to renegotiate after Taiwanese regulators balked at the original deal terms on behalf of Hon Hai's shareholders. Sharp executives have lost hope of reviving a deal with Hon Hai, according to people familiar with the talks.
The official deadline, laid out in the original deal, is Tuesday. Sharp said the talks are continuing, but declined to elaborate further. A spokesman for Hon Hai said "discussions are continuous and not guided by any schedule or timetable."
The search for a possible investor has been challenging because Sharp doesn't want to relinquish too much control as part of any deal, and the pool of potential partners has decreased amid the troubles gripping the company's domestic peers.
With few available capital options, Sharp remains highly dependent on its two main lenders, Mizuho Corporate Bank and Bank of Tokyo-Mitsubishi UFJ, which will review whether to extend a make-or-break ¥360 billion, or $3.8 billion, credit line to Sharp in June. According to people familiar with the banks' thinking, the two lenders are expected to extend the credit line.
Electronics maker Sharp has struck deals with Samsung and Qualcomm but needs to raise more capital.
Sharp is confronting a tough financial situation. Reeling from losses over the past two fiscal years ending in March after failed billion-dollar investments on new LCD production facilities in Japan, Sharp has interest-bearing debt of $12.4 billion, or more than seven times the amount of cash on hand. Its debt rating has fallen below so-called junk status and the stock is off more than 50% from a year earlier, despite significant gains in Japanese stocks overall. Sharp also faces a ¥200 billion convertible-bond redemption in September.
There are fewer and fewer fundraising options available to Sharp's management," said SMBC Friend Research Center analyst Hiroshi Sakai. "Creditor banks will inevitably play bigger roles," increasing the likelihood of more drastic steps such as selling off some businesses, he said.
Sharp's lenders are already urging the company's management to be more aggressive about selling assets or businesses. But Sharp executives are more focused on securing additional capital before taking more drastic restructuring measures, according to people familiar with the talks between Sharp and the banks.
Sharp said it has sold its Tokyo office buildings, while scaling back output at two domestic manufacturing sites. It has also announced plans to cut 5,000 jobs globally, the first layoffs to hit its domestic workforce since 1950. It also cut salaries and scaled back investments.
On Monday, it said it agreed to transfer all of its 51% holding in a 182-person information-system joint venture to its partner in the project, International Business Machines Corp.'s IBM +0.77% Japanese arm. Sharp didn't disclose the terms of the deal.
In one sign of differing views between the banks and Sharp, the company turned down Samsung's offer to buy its copier business as part of the capital-alliance talks, even though the creditors had asked the company to consider selling the unit, said a person familiar with Sharp's thinking. Sharp didn't want to sell the copier business—which is highly profitable even though it has little global reach—from a position of weakness, the person said.
"While we had previously expressed an interest in Sharp's copier business, Sharp has rejected our interest in this matter," said Samsung in a statement. Sharp said it decided to hold on to the unit because it remains an attractive business.
Mizuho and Bank of Tokyo-Mitsubishi UFJ, which each have about ¥400 billion in loans outstanding to Sharp, are expected to take a bigger role in overseeing its restructuring, including sending in their own turnaround specialists as early as next month, according to people familiar with the banks' thinking. A Mizuho spokeswoman declined to comment on the continuing talks with Sharp. She said Yasuhiro Sato, chief executive of Mizuho Financial Group Inc., 8411.TO -1.43% has said his bank will continue to monitor Sharp's progress in turning the company around. A spokesman for Bank of Tokyo-Mitsubishi UFJ said it will maintain its support for Sharp, but declined to elaborate further. Sharp said it doesn't comment on its talks with its banks.
Sharp's capital-alliance negotiations with other companies are shaped in several instances by a triumvirate of current and former presidents. Mr. Okuda, who took over in June, is joined in that role by his two predecessors—current Chairman Mikio Katayama and to a lesser degree former Chairman Katsuhiko Machida, according to people familiar with Sharp's management.
Despite relinquishing his representative rights for Sharp when he became chairman, Mr. Katayama took charge in negotiating capital alliances with industry partners, including the deals with Samsung and Qualcomm, these people said. Meanwhile, Mr. Machida, who is now a corporate adviser and comes to Sharp's Osaka offices only a few times a week, was actively involved in the negotiations with Hon Hai, these people said.
Terry Gou, Hon Hai's CEO, told a Taiwanese television station in August that Messrs. Katayama and Machida released him from the agreement to invest in Sharp, saying the Japanese company didn't want to be "a burden" to its Taiwanese partner.
In late August, as he rode the train from Tokyo to Sharp's hometown of Osaka, Mr. Gou pondered the fate of the Japanese company, which celebrated its 100th anniversary last year. "How many companies can say they've lasted 100 years? Lasting that long is an asset," Mr. Gou said. "But these days, with information technology moving so fast, it's hard."
—Juro Osawa in Hong Kong and Lorraine Luk in Taipei contributed to this article.
Write to Daisuke Wakabayashi at Daisuke.Wakabayashi@wsj.com and Atsuko Fukase at email@example.com
A version of this article appeared March 26, 2013, on page B3 in the U.S. edition of The Wall Street Journal, with the headline: Japan's Sharp Faces Dwindling Financing Options.
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