Renewed speculation that Sharp is considering a ¥100bn (US$1.07bn) equity offering drove down its share price today to its lowest level since the beginning of the year. The shares lost 10.3% before rallying to close at ¥264, down 5.75% for the day, following reports after market close yesterday evening that the company had decided to raise ¥100bn via a public share offering.
Sharp’s market capitalisation was just ¥289bn at today’s close. The electronics conglomerate said a decision on a capital increase has not been made.
ECM bankers in Tokyo believe Sharp desperately needs to raise capital but ruled out the possibility of a deal before the end of June, when the blackout period ends after the company announces its full-year earnings and mid-term management plan.
Sharp has postponed the earnings announcement to May 14, the same day it plans to make public its mid-term plan. Last year, its earnings were reported on April 27.
The mid-term plan, which is expected to show how the company plans to turn around its poor performance in the past two years, is seen by bankers as absolutely necessary to justify a dilutive share offering. Sharp is forecast to post a net loss of ¥449.4bn for the year ending March 2013, wider than the previous year’s loss of ¥376bn, according to StarMine Smart estimates.
Bankers ruled out the possibility of any fundraising involving debt, because of the state of Sharp’s credit – of the net debt burden of just under ¥1trn, ¥560bn will mature between June and September, the most pressing issue being how the company will meet the end-September maturity on its ¥200bn convertible bond.
While market speculation is centring on equity instead, it remains to be seen who would buy new Sharp shares.
With the stock borrow on Sharp quoted at 15%–30%, the stock market appears to have already priced in a dilutive share offering.
“Every hedge fund is prepared for the impending capital increase,” said one ECM banker.
Yet the level of short covering that could accompany a capital increase – assuming investors believe the trade represents a floor for the stock price – is nowhere near enough to cover the likely deal size, bankers said.
Another banker suggested the deal could be for overseas investors only, however, a third banker said there was a risk that overseas demand can melt away and disappear, citing the case of All Nippon Airways’ ¥160bn follow-on last July. On that deal, the overseas portion was cut by two-thirds to around 10% from the original 30%.
Risks also remain on the traditional option: placing with retail investors. Many Tokyo ECM bankers said that could be dangerous for all involved, including the underwriting banks if individual investors subsequently suffer large losses. At the absolute minimum, Sharp needs to have a convincing explanation on which part of its business will be the core earnings driver before new shares can be sold to retail investors, said one banker at a Japanese house.
In addition, the banks – in this case Bank of Tokyo-Mitsubishi UFJ and Mizuho Corporate Bank which led the ¥360bn secured syndicated loan package that matures in June – and their brokerage subsidiaries would have to agree on a new financing package alongside or ahead of the public share offering. Possibilities include a subordinated, convertible loan from the banks.
One banker suggested the ideal option for Sharp would be a capital injection from a rival firm. Finding an electronics company that is willing to pump ¥100bn into the Japanese firm may be a struggle, however. In early March, South Korea’s Samsung Electronics agreed to invest just ¥10.4bn in the Japanese company for a 3% stake, while Taiwan’s Hon Hai let the end-March deadline pass on its ¥66bn planned investment.
Although it is legally possible to launch a public share offering before the official earnings announcement and shareholders’ assembly, usually held in late June, the deal would have to be based on unaudited financial results, said a capital markets lawyer. In addition, only shareholders registered at March 31, the last day of the financial year, are eligible to attend the general assembly. None of the new shareholders who subscribed in an early share offering would therefore be eligible to attend the general assembly in June, according to the lawyer.
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