Sharp Corporation Restructuring Will Wipe Out Shareholders

Shares of Japanese electronics manufacturer Sharp Corporation fell off a cliff on Monday as the troubled firm announced a restructuring that essentially shuts out shareholders.

Sharp Corporation

According to an article in the Wall Street Journal quoting an unnamed company source, Sharp will reduce its capital by more than 99% to just ¥100 million ($834,000) in a restructuring plan to be announced later this week. The firm is also expected to issue new preferred shares to its primary lenders in return for debt relief.

More on Sharp Corp restructuring

This is the second restructuring for Sharp Corp in the last three years. The bleak prospects for the firm contrast with the improving outlook at other Japanese electronics companies such as Panasonic and Sony. While these firms have moved away from low-profit consumer electronics, Sharp continues to deal with tough competition in its primary business of making liquid-crystal displays for electronic devices such as smartphones and tvs.

The final blow for Sharp seems to have been the recent weakness of the Japanese currency. The firm has a major domestic consumer appliance business, but most products are manufactured abroad. However, the company cannot raise prices in yen terms to try and make up for higher manufacturing costs abroad.

The news of the impending restructuring including reducing capital highlights ongoing concerns about the company’s poor financial position. Shareholder capital is money that was originally raised by selling stock. Sharp can cover losses that have accumulated on its books by reducing this capital. While such a move will will be a big boost to the firm’s balance sheet, it would leave common shareholders holding nearly worthless shares (shares might eventually have some value with a successful turnaround).

“The company will survive but for common shareholders its value is nearly zero,” notes Atul Goyal, an analyst at Jefferies & Co. “The banks are keeping it going.”

Mizuho Bank and Mitsubishi UFJ Bank hold more than ¥600 billion of Sharp debt most of which would be lost if the company went bankrupt, so the two banks have been pressing for another restructuring as the firm’s financial position weakened..