UPDATE 1-Options narrowing for Japan's cash-strapped Sharp

Mon Aug 6, 2012 4:05am EDT

TOKYO Aug 6 (Reuters) - Japan's cash-strapped Sharp Corp may end up with only one option to survive - dump its consumer business and submit to a future as a component maker for Taiwanese partner and fellow Apple supplier Hon Hai Precision Industries.

The struggling pioneer of LCD televisions is relying for backing on its main banks, Mizuho Financial Group and Mitsubishi UFJ Financial Group. A source at one of Sharp's main banks told Reuters those lenders may insist on closer ties to Hon Hai and the sale of non-LCD businesses to raise cash in return for help.

In the wake of a deteriorating earnings outlook and ratings downgrades, investors have begun questioning the viability of 100-year-old Sharp, which on Monday was still insisting Hon Hai honour a money-losing deal to take an equity stake in the firm.

Battered by foreign competition and waning demand for its TVs, and too few customers to buy its LCD panels, Sharp's shares have lost nearly three-quarters of their value since the start of the year. The cost of insuring its debt against default has been widening since February.

A major stake in Sharp would give Hon Hai, whose shares jumped on Monday, some control over another piece of Apple's supply chain. Sharp supplies screens for the U.S. company's iPhones and iPads, some of which are assembled in the Taiwanese company's factories.

Uncertain would be the future of Sharp's TV assembly plants in Japan, Poland, Mexico, Malaysia and China, along with the thousands of jobs they provide. Sharp in 1960 was the first Japanese company to mass produce TVs.

"They would have to close down TV plants in markets where they were losing, while there would be factories that Hon Hai would want," said Yasuo Nakane, an analyst for Deutsche Securities in Tokyo.

COUNTDOWN

Sharp's refinancing clock is counting down. A 200 billion yen ($2.54 billion) convertible bond matures in September next year, but Sharp, with debt totalling 1.25 trillion yen, including 360 billion yen of short-term commercial paper, may need to raise cash earlier.

A net loss of 138 billion yen in the three months ended June 30 eroded Sharp's equity ratio to 18.7 percent, below the 20 percent threshold generally considered to be healthy.

"The decline in demand has been so rapid that the company has been unable to halt the decline in earnings," Nomura Holdings said in a report.

Local TV rivals Sony Corp and Panasonic Corp , have also been hurt as overseas competitors, particularly South Korea's Samsung Electronics, steal market share. Combined, the three Japanese makers expect to sell 10 million few sets this business year than in the previous twelve months.

Before revealing expanded losses on Thursday, Sharp had been relying on a cash injection of 66 billion yen from Hon Hai, the flagship of Taiwan's Foxconn Group, in return for giving it a 10 percent stake. The deal was agreed in March but has not yet been paid.

NO DEAL

However, a share slump of more than 30 percent in the past two days that has seen Sharp's stock drop to below 190 yen means Hon Hai is no longer prepared to honour a deal that values its shares at 550 yen apiece. At Sharp's current market value a 66 billion yen investment could buy Hon Hai a third of its stock.

In a statement on Friday, Hon Hai said that Sharp had already released it from the terms of the deal "due to the volatility of Sharp Corporation's share price". The Japanese company responded on Monday by insisting that it expected the Taiwanese firm to fulfil the original terms.

"We haven't agreed to that," Sharp spokeswoman, Miyuki Nakayama, said, when asked about Hon Hai's statement.

Still, the choice for Sharp is to accept less money or agree a bigger stake for Hon Hai - and with it greater management say that may urge it to close down its TV assembly plants and sell off its solar panel and appliance units.

Barclays Capital analyst Kirk Yang predicted Hon Hai would still buy a 10 percent stake in Sharp, but at a renegotiated price of 200-300 yen per share.

Shares of Sharp, the inventor of the electronic calculator, on Monday fell 5.7 percent to 181 yen, their lowest closing level since 1976, after slumping almost 30 percent on Friday. Hon Hai shares in Taipei were 5.7 percent higher.

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