Advantage may struggle with Sanyo chip buy: sources

TOKYO (Reuters) - Japanese private equity firm Advantage Partners is talking to banks about financing its buyout of Sanyo Electric Co's (6764.T) troubled semiconductor unit, but may struggle to find support due to turbulent credit markets and its high bid, sources familiar with the matter said.

Advantage Partners offered about 120-130 billion yen ($1.1-$1.15 billion) for Sanyo Semiconductor Co which parent Sanyo Electric has put up for sale as part of its restructuring under the eye of shareholder Goldman Sachs (GS.N).

The extent of restructuring needed and the unfolding crisis in global credit markets has unnerved bankers. Private equity firms typically pay for companies using a little of their own equity capital and a lot of debt from lender banks.

One of the banks Advantage is talking to is Citigroup (C.N). The U.S. bank is said to be cautious about its ability to syndicate any loans to other banks and so has not fully committed to underwrite the deal. A spokeswoman for Citigroup declined to comment.

If this option falls through, Advantage may ask Goldman to loan it capital. As part of the deal package, Goldman offered all of the suitors loans of 70 billion yen ($620 million) comprising senior loans and mezzanine finance but this would mean Advantage would have to put up a lot of its own money.

Sanyo spokesman Akihiko Oiwa said nothing has been decided.

TOUGH TIMES

Sanyo Electric is all but certain to fall short of its original plan of raising between 150-200 billion yen for the unit, which has been floundering since an earthquake in 2004 hit its factory in northwest Japan, ruining equipment and causing customers to go elsewhere.

Osaka-based Sanyo Electric spun off the chip-making business last year in a move widely seen as a prelude to selling it. The unit posted 181.27 billion yen in sales in the year ended March, and posted an operating profit of 4 billion yen.

Sanyo's chip unit boasts leading market shares in a handful of key analog devices and is thought to have a team of very capable engineers. Another attraction is its steady cash flow, which investment funds could securitize.

But parent Sanyo Electric has lost $3.6 billion over the past three years, and therefore not had the funds to invest enough in research and equipment to give its chipmaking operations a shot at keeping pace with deep-pocketed rivals.

"The business is in a very dangerous position; it has been losing revenues and market share and its operations are untenable," said one of the sources.

Financial sources have said Sanyo's asking price is very ambitious given the chip unit may need much more costly restructuring. A big earthquake this July in Niigata Prefecture in the area of Sanyo's main chip factory reminded investors of the risk.

"The firm has to go from being a very diversified and domestic business to being more focused and global," said another of the sources.

"Is this deal going to close? It's an open question," he added.

HIGH STAKES

The closing stages of the bidding battle have proved dramatic. Final bids were due in on August 31 after which regional private equity firm The Longreach Group Ltd emerged as the leading contender with a bid of around 110 billion yen ($974 million).

Since then, however, Advantage raised its bid and Longreach walked away from the deal, according to third-party sources.

Funds experienced in semi-conductor investments globally have also headed for the exit as the bidding escalated, including The Blackstone Group BG.UL led by senior managing director Paul (Chip) Schorr, who has completed several deals in the chip industry including the buyout of Fairchild Semiconductor.

Other well-known investment firms experienced in technology deals that walked away are Francisco Partners and Advantage's partner Boston-based Bain Capital.

Advantage has been granted exclusive negotiating rights and time to gather the necessary funds; if it fails Sanyo and Goldman may have to go back to one of the jilted suitors.

Sanyo is eager to at least get book value for the chip unit which stands at about 100 billion yen.

Sanyo has closed plants and cut thousands of jobs over the past few years in response to a downturn in sales of core products and the semiconductor unit's problems.

The heavy losses forced Sanyo to issue 300 billion yen worth of preferred shares to Goldman Sachs and two other banks at a deep discount last year.

Sanyo, headquartered in the western city of Osaka is considering the sale of other assets and is expected to announce a major restructuring in November.