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Sharp has found an unlikely friend. The cash-strapped Japanese electronics group has secured a $111-million cash injection from Korea's Samsung, one of its long-standing rivals. The deal represents an important vote of confidence in Sharp. But with net debt of $11-billion, it will need a lot more equity before it is out of the danger zone.
At first glance, the euphoric reaction to the deal looks exaggerated. Sharp's market value jumped by around $500-million – almost five times the value of Samsung's investment. Yet the strategic benefits are difficult to quantify. Sharp has secured a long-term contract to supply liquid crystal displays, but Samsung was already a customer, so it's hard to argue that the deal unlocks a large new source of revenue. Samsung, meanwhile, was presumably keen to lock in a supplier which might otherwise be tempted to do more business with rivals such as Apple, or aggressive new Chinese manufacturers.
The share purchase is small change for the Korean group, which had more than $11-billion of net cash on its balance sheet at the end of December. But it does little to help Sharp, which ended 2012 with the same amount in net debt. Combined with a similarly-sized investment from U.S. manufacturer Qualcomm in December, Samsung's equity injection is mainly useful as a signal that other electronics firms believe Sharp will turn itself around. It's also significant that Sharp has been able to secure support from outside the closed circle of Japanese banks and manufacturers that traditionally tend to prop up the country's ailing companies.
Nevertheless, Sharp's balance sheet still needs drastic reconstruction. It has bought some breathing room by cutting a deal with banks that covers its refinancing needs to 2014, and cost-cutting delivered a rare operating profit in the most recent quarter. The yen's recent fall may ease the pressure on domestic exports, and has also helped to spark a share price rally. Sharp's shares have doubled in value since November. To secure its turnaround, however, it needs to pay off a lot more debt. Perhaps Sharp can ask its newest shareholder to support a large capital increase.