UPDATE 5-Japan's TDK to buy Germany's Epcos for $1.9 bln

(Adds TDK executive comment, background, details)

By Mayumi Negishi and Kentaro Hamada

TOKYO, July 31 (Reuters) - Japan's TDK Corp (6762.T) said it plans to buy German electronic parts manufacturer Epcos AG EPCGn.DE for $1.9 billion in cash, seeking growth overseas and a push into industrial-use components.

TDK will launch a friendly tender offer for all shares of Epcos at 17.85 euros ($27.81) a piece, a 29 percent premium to Wednesday's close and at 1.2 billion euros marking the biggest acquisition by a Japanese electronic parts maker on record.

The deal is expected to boost TDK's market share in capacitors and inductors, helping it cope with the price falls eating into profits across the industry, including rivals Murata Manufacturing Co (6981.OS) and Kyocera Corp (6971.T).

TDK and Epcos said there was little business and geographic overlap between them. TDK mainly supplies parts for consumer electronics and has a solid foothold in Asia while Epcos is strong in Europe and in auto and industrial-use components.

A growing number of cash-rich Japanese firms are hunting for opportunities abroad. Outbound Japanese acquisitions for 2008 came to $24 billion as of July, nearly matching the haul for all of last year, according to Thomson Reuters data.

"We have never done such a large investment. The market conditions are difficult and the fortunes of our company are at stake," TDK President Takehiro Kamigama told a news conference.

Shares of TDK closed down 1.5 percent at 6,500 yen, after Reuters and other media reported that a deal was imminent, raising concerns among investors over the heavy financial burden. Shares of Epcos jumped nearly 29 percent.

Credit ratings agency Moody's said it was reviewing TDK for a possible downgrade given the large size of the acquisition, which is roughly equal to TDK's cash balance. TDK said it would finance the deal through a bridge loan.

TDK, which makes tiny components used by the hundreds in mobile phones, personal computers and flat-panel televisions, said combining with Epcos would give it the scale to become more efficient in development, procurement and sales.

"We think it will be a positive move for TDK," said Macquarie Securities analyst George Chang, adding that it would strengthen TDK's position in both China and Europe. "Epcos is a strong player in Europe and in the auto industry."

Epcos is Europe's biggest maker of passive electronic components that control the flow of electricity, supplying capacitors, inductors and surface acoustic wave parts for use in cars and consumer electronics.

Formed in 1989 as a joint venture between Germany's Siemens (SIEGn.DE) and Matsushita Electric Industrial Co (6752.T), Epcos had sales of 1.4 billion euros in the year ended September 2007.

Combined with Epcos, TDK's annual sales would total some 1.1 trillion yen, making it the second-largest components maker in Japan after Kyocera, which logged sales of 1.3 trillion yen last business year.

TDK, which last year took over Alps Electric Co Ltd's (6770.T) hard drive head business, has been pursuing acquisitions to gain economies of scale needed to weather price falls and to give it a stronger presence overseas.

But it has been hit along with its rivals by a slowdown in the global economy. On Thursday, TDK posted a 72 percent fall in group net profit for the three months ended June 30 and cut its annual forecast by 15 percent to 55 billion yen. (Additional reporting by Mari Saito, Sachi Izumi and Nathan Layne; Editing by Edwina Gibbs and Chris Gallagher)