UPDATE 2-Spansion explores possible sale, hires Barclays

(Recasts, adds analyst comments)

By S. John Tilak

BANGALORE, Jan 15 (Reuters) - Chipmaker Spansion Inc SPSN.O, weighed down by a mountain of debt, is exploring a possible sale of itself as it struggles for survival in worsening market conditions.

The maker of flash memory chip products said Thursday it has engaged Barclays Capital to assist with the process.

The company has been hurt by falling prices in the memory market and inventory issues, and it has had to try to sell assets and shut down facilities, analysts said.

Spansion doesn't have the balance sheet to weather the economic downturn, Caris & Co analyst Betsy Van Hees said.

"They're running into a time constraint," Van Hees said. "They could do with money to continue to run the company. And without the ability to go out and get additional credit, it's either a sale or merger or unfortunately -- the worst case scenario -- bankruptcy.

"They're doing this to avoid going into bankruptcy and defaulting to their creditors," she said.

Spansion has long-term debt of about $1.5 billion, said ThinkEquity analyst Vijay Rakesh.

The company said it had started talks on potential balance sheet restructuring opportunities and it would delay the interest payment on its senior notes due 2016.

Spansion competes with market leaders Samsung Electronics (005930.KS) and Japan's Toshiba Corp (6502.T) in the flash memory market. Flash memory allows a device to retain data even when its power is turned off.

The whole memory space is seeing oversupply, and Spansion is struggling with light demand and running into intense competition not only from Samsung but also from Intel (INTC.O) in the next-generation products, Rakesh said.

"The NOR flash space is ripe for consolidation," he said. The $8 billion NOR flash market, where Spansion is the market leader, would be attractive for buyers because it has higher gross margins than the NAND flash and DRAM industries, Rakesh said.

Japanese electronics conglomerate Fujitsu Ltd (6702.T) owns about 11.4 percent of Spansion, while U.S. chipmaker Advanced Micro Devices (AMD.N) has an 8.7 percent stake, according to Thomson Reuters data.

A merger with a competitor would be good for pricing, supply/demand and the marketplace, Van Hees said.

Spansion was in talks with a couple of companies, she said.