* Issue to finance production upgrade, pay down debts
* Shares jump 5.2 pct after announcement
* Elpida expects 25 pct dilution if bonds are converted
* Japan's CB issuance rises for first time in four years (Adds comments, details)
By Sachi Izumi and Taiga Uranaka
TOKYO, Oct 8 Japanese PC memory maker Elpida Memory 6665.T said it will issue $729 million in convertible bonds to invest in equipment and repay debt as it aims to better compete with Samsung Electronics (005930.KS) and other rivals.
Elpida, the world's No. 3 maker of DRAM chips, joins a growing list of Japanese firms issuing convertible bonds this year, with issuance logging year-on-year growth for the first time in four years, according to Thomson Reuters data.
Shares in Elpida reversed earlier losses triggered by media reports of the bond issue and closed up 5.2 percent percent after the official announcement. Volume spiked to nearly 19 million shares, three times the daily average over the past three months.
"Investors initially reacted negatively to the news, but they had finished digesting the news and decided to bet on Elpida's agressive growth strategy to fight against Samsung," said SMBC Friend Securities market strategist Hideaki Higashi.
"But it's still too early to buy up their shares because Samsung is very competitive and it's not easy to catch up with them."
Elpida faces a tough battle against Samsung and Hynix Semiconductor (000660.KS) in the DRAM (dynamic random access memory) market at a time when weakening PC sales growth has been pressuring prices.
It vies with U.S.'s Micron Technology (MU.O) for the No. 3 spot in the DRAM market.
Elpida has been expanding production in growing fields such as mobile DRAM as well as entering the NAND chip sector and other new areas to boost competitiveness in the crowded market.
Elpida had said on Thursday that it was looking at buying shares in Taiwanese chipmakers, taking another stab at deepening cross-border ties to fight together against South Korean rivals. [ID:nTOE696015]
"It is key whether companies can increase their market share when market conditions turn upwards, and this requires capacity expansion," Mizuho Investors Securities analyst Yuichi Ishida said.
"From the global point of view, they are finally doing what they should be doing," he said, adding Japanese chipmakers had fallen behind rivals in the past because they tended to invest when the market was strong but lost money when the silicon cycle was negative.
Elpida said in a statement it would use the proceeds to upgrade its chip production capabilities and for research on advanced chips, while using part of the money to pay back debts and redeem straight bonds, a more costly form of funding than convertible bonds.
It said last month it would start mass production of DRAM chips using the 30-35 nanometre circuitry, putting it ahead of Samsung in cutting-edge technology. [ID:nTOE68S00O]
Elpida is assuming a conversion price of 1,177 yen at a 32 percent premium to Thursday's closing price of 892 yen. The number of shares outstanding would increase by 25 percent if all the bonds are converted at that price.
Its stock had dropped by as much as 5.6 percent in the morning to its lowest intraday level since April 2009 after media reports of the planned bond issue.
Elpida's move puts this year's tally of convertible bond issuance by Japanese companies at more than 400 billion yen. Companies like Nidec Corp 6594.OS and Unicharm Corp (8113.T) have also issued convertible bonds this year.
Daiwa Securities Capital Markets is the lead underwriter of Elpida's issue. The bonds will mature in October 2015. ($1=82.34 Yen) (Additional reporting by Mariko Katsumura and Junko Fujita; Editing by Chris Gallagher and Joseph Radford)