Japan's Mazda Motor Corp. plans to raise $2.1-billion (U.S.) to shore up its finances and invest in a new plant in Mexico, financial sources said on Tuesday – a bigger-than-expected dilutive fundraising that sent its shares tumbling 10 per cent.
The loss-making auto maker aims to raise ¥100-billion ($1.3-billion U.S.) through a public share offering and ¥70-billion through subordinated loans from banks, two sources with knowledge of the matter said.
If Mazda were to raise ¥100-billion through a new issue at Tuesday's closing share price of ¥145, just under 690 million shares would need to be added, representing a huge 38.7 per cent dilution of existing shares.
"I think share reaction of this size is to be expected for such a large surprising fund-raising," said Kenichi Hirano, operating officer at Tachibana Securities.
Battered by a strong yen, the nation's No.5 auto maker is set to post its fourth straight annual net loss in the financial year to March. This month it predicted red ink of ¥100-billion, much worse than an earlier estimate of a ¥19-billion loss.
Mazda, which makes the Mazda2 subcompact and the Mazda3 compact car, is the most exposed among Japanese auto makers to currency swings, building about 70 per cent of its vehicles in Japan and exporting 90 per cent of those last year.
"The company's fundamental outlook is still very grim and at the same time there is a huge need for cash," said Koji Endo, analyst at Advanced Research Japan.
"Even if they raise ¥170-billion, which sounds like a pretty big number, when they get done paying the bills, it could evaporate pretty quickly," he said.
To reduce its reliance on exports, Mazda plans to construct a plant in Mexico and renovate its Thai factory, and lift its overseas production ratio to 50 per cent from 30 per cent in four years time.
Other capital expenditure plans include the introduction of its next-generation engine and transmission technology on all its cars by around 2016. It is also considering a venture with Russian car maker Sollers to produce Mazda cars in Vladivostok, as well as production capacity increases in China.
A share offering would follow one in 2009, when Mazda raised ¥98-billion via a mixture of new shares and treasury stock.
One financial source said the new loans would be provided by Sumitomo Mitsui Financial Group, the state-backed Development Bank of Japan and other banks, adding that the announcement could come on Wednesday.
Mazda said in a statement that no official decisions had been made.
Investors have questioned how much longer Mazda, without major market share and unable to remain profitable as a niche brand, will continue in its current form.
"I don't think Mazda can continue on as an independent, and with its future vision still unknown, it's hard to make an investment decision on it," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management.
Mazda CEO Takashi Yamanouchi said last week the car maker is in talks over project-based tie-ups but played down the possibility of a capital alliance citing its partnership Ford Motor Co.
While the two still operate joint car factories in China and Thailand, their relationship has weakened with Ford's stake now just 3.5 per cent compared with a peak of 33.4 per cent.
Shares in Mazda ended down 10 per cent after falling as much as 14 per cent at one stage. It was the most actively traded stock by volume on the Tokyo bourse's main board.