Sharp rises on prospects of rescue deal with Japan fund

Sharp Corp. shares rose as the company moves toward a rescue plan with government-backed Innovation Network Corp. of Japan rather than a potentially larger offer from Taiwan's Foxconn Technology Group.

Sharp is learning toward a deal with INCJ that would allow it to keep its technology within Japan and cooperate more closely with domestic companies, people familiar with the talks said Thursday, asking not to be named because the matter is private. The company's stock rose 3.1 percent at the close in Tokyo on Friday, after earlier climbing as much as 12 percent.

INCJ may invest about 300 billion yen ($2.6 billion), splitting the funds between Sharp's LCD panel business and remaining operations, one of the people said. Foxconn has offered about 600 billion yen to buy the company and expects a decision this month, a separate person familiar with the talks said. INCJ's investment would be the most recent example of Japan's government providing support to struggling domestic companies to keep technology out of the hands of foreign rivals. Four years ago, INCJ created Japan Display Inc. from the troubled screen units of Toshiba Corp., Sony Corp. and Hitachi Ltd. with a 200 billion yen infusion.

"There is only one option -- when was the last time a Japanese company in good shape or bad was allowed to sell its technology to another Asian company?" said Atul Goyal, an analyst at Jefferies Group LLC. Sharp stock has lost more than half its value in the past three years. Twelve analysts including Goyal recommend selling the shares, out of 14 tracked by Bloomberg .

"We're talking with several companies about the structural improvement of liquid-crystal-display business. We don't comment on the details of individual talks," said Yoshifumi Seki, a spokesman for Sharp. Foxconn is interested in expanding its business beyond assembly of products and logistics, by adding a wider array of components to its offerings. Sharp, one of the world's largest makers of displays for smartphones and tablets, could gain more business from Apple and other Foxconn customers like Amazon.com Inc and Xiaomi Corp.

The possibility of a government bailout first surfaced in 2012, when Sharp teetered on the brink of bankruptcy after its Aquos TVs lost market share to those from Samsung Electronics Co., LG Electronics Inc. and lower-cost Chinese rivals. The Osaka-based company is set to post a combined 1.22 trillion yen of net losses over five years to March 31. INCJ, formed in 2009 to help fund innovation and keep key technologies within Japan, has had mixed success in reviving companies. Japan Display's shares are trading 70 percent less than their initial public offering price.

The fund's investment in Renesas Electronics Corp., formed in 2010 by combining the struggling semiconductor operations of Mitsubishi Electric Corp., Hitachi and NEC Corp., fared better. Shares of the supplier of chips to automakers more than doubled in 2013, then gained 33 percent in 2014, driven by demand for chips used in cars with increasingly complex electronic systems.

"I can imagine an INCJ proposal that would split the company into the bad Sharp, which is LCD panels, and with the rest as good Sharp," Goyal said. "With INCJ it would go much smoother, much easier. Sharp, INCJ and Japan's government are likely to worry about the job losses. Moreover, INCJ Fund says Sharp needs just $2.5billion to revive growth.

A cash infusion of 300 billion yen ($2.5 billion) is enough to plug losses and revive growth at Sharp Corp., according to the head of the government-backed fund considering a rescue of the struggling electronics maker. Toshiyuki Shiga, chief executive officer of Innovation Network Corp. of Japan, said the fund is conducting due diligence but hasn't reached a final agreement on bailing out the company laden with almost 800 billion yen of total debt. INCJ is considering an investment of about 300 billion yen, splitting the funds between Sharp's liquid-crystal-display panel business and remaining operations, a person familiar with the discussions said last week. "Our goal is a return to growth. After separating the LCD business, we'll stop the hemorrhaging and implement a growth strategy for the rest of the company," Shiga told reporters after an unrelated government-panel meeting in Tokyo.