Sharp lines up measures to regain its edge

Less than three years after its last bailout, Sharp is in deep trouble yet again.

Shares in the Japanese panel maker fell more than 25 per cent on Monday after the company said it may issue preferred stock and cut capital. The Nikkei business daily reported at the weekend that Sharp planned to reduce its capital by 99 per cent to wipe out losses accumulated in previous years.

The woes at the century-old company that started out making mechanical pencils come as Japanese rivals including Panasonic and Sony are beginning to turn round, after selling off underperforming assets and moving from volatile consumer products into more profitable businesses.

In the wake of the Lehman crisis in 2008, Sharp faced similar financial difficulties following aggressive investments in liquid crystal display and solar panels - products that foreign rivals can make just as well at lower cost.

At that time, its banks came to the rescue as Sharp shifted focus from television and solar panels to LCD displays for smartphones and tablets. The company cut jobs and wages, sold overseas factories and mortgaged offices in Japan.

Sharp was involved in discussions before the 2012 creation of Japan Display out of the LCD units of Hitachi, Toshiba and Sony, but pulled out of the talks saying it could survive on its own given its cutting-edge panel technology, according to people who were involved in the deal at the time.

Three years on, Sharp is expected to report a loss of more than Y200bn ($1.7bn) for the fiscal year ended in March when it announces earnings and its turnround plan on Thursday.

It eked out a small profit last year but recorded a combined loss of nearly $8bn for the previous two fiscal years. Net income is down nine-tenths from the 2008 peak and net margins are just 0.4 per cent.

What rescue measures are on the table and can Sharp be saved again?

Here are some options being discussed:

1. Sharp is considering spinning off its LCD operations into a separate subsidiary, say people familiar with the plan. That would enhance accountability, similar to Sony's move to split off its TV and soon its audio division into wholly owned units. But it would be highly unusual considering Sharp has long positioned LCD panels for smartphones as its key growth driver.

2. The company has talked about the possibility of working with the Innovation Network Corp of Japan, a government-backed fund and investor in Japan Display. Analysts would welcome that option, and "the door is always open", a person close to INCJ says - but discussions are not expected to go smoothly as INCJ is unlikely to invest without having a majority stake in the spun-off LCD unit, something Sharp is expected to oppose. "We believe a shift to co-operation from competition could ease price competition and help cost control," analysts at Goldman Sachs say. Sharp executives have denied the idea of a merger with Japan Display.

3. Sharp's main lenders, Mizuho and Bank of Tokyo-Mitsubishi UFJ, are expected to inject a total of Y200bn ($1.7bn) in a debt-for-equity swap. As part of such a deal, the company is reportedly considering cutting 5,000 jobs, or 10 per cent of its workforce, and selling more plants. Atul Goyal, Jefferies analyst, says that "the easy way out [for banks] is to lend another Y50bn-Y100bn to Sharp and delay the inevitable, while hoping for the best". "Thanks to banks, we believe Sharp will not go under," adds Mr Goyal.

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