Hitachi may sell stake in hard drives: sources

By Alison Tudor and Kentaro Hamada

TOKYO (Reuters) - Hitachi Ltd (6501.T), Japan's biggest electronics conglomerate, is considering selling a stake in its hard disk drive arm to a strategic investor to help it turn the loss-making business around, sources close to the matter said.

The news sent shares of Hitachi, a sprawling conglomerate whose products range from nuclear turbines to washing machines, up 7 percent to a one-month high in its biggest one-day percentage gain in four years.

Hitachi has not posted a profit in its hard disk drive (HDD) business since buying it from IBM (IBM.N) for $2 billion in 2002 due to crumbling prices of disk drives.

"This would mean a sea change in Hitachi. It's about time," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management. "Hitachi should still be able to find a buyer, with HDDs expanding into non-PC markets."

Investment bank Merrill Lynch MER.N has already sounded out private equity funds that may be interested in the unit, according to several financial industry sources.

The Carlyle Group CYL.UL, Kohlberg Kravis Roberts KKR.UL, Bain Capital, and Silver Lake are among funds cited as possible investors, the sources said.

Hitachi may seek a fund to buy an equity stake in the hard disk drive business and then work with the fund to help revive it, one financial industry source said.

But it was not immediately clear if Hitachi might also look to unload the entire business.

"The negotiations have just started. It is unclear what the outcome will be," said one source.

Hitachi said it is studying various options, and that it has made no concrete decisions.

Merrill Lynch Japan Securities spokesman Tsukasa Noda said he could not confirm whether the bank was involved in any such deal.

Hitachi shares closed at 750 yen after hitting a high of 760 yen. The benchmark Nikkei average .N225 ended up 2.4 percent.

Hitachi's HDD unit lost $375 million in calendar 2006, a 60 percent bigger loss from the previous year, hurt by sliding prices for drives as laptop makers turn to flash memory drives for cooler and faster storage.

The Tokyo-based company, which holds a little less than 20 percent of the global HDD market, trails industry leaders Seagate Technology STX.N and Western Digital (WDC.N), which have been profitable despite aggressive notebook computer pricing.

Hitachi has promised its hard drives would be profitable this year, and has said it would close an HDD parts factory in Mexico and cut 4,500 jobs by the end of 2008.