By Tim Kelly and Miyoung Kim
TOKYO/SEOUL (Reuters) - Samsung Electronics Co, with a $110 million investment in cash-strapped Sharp Corp, will broaden its supplier base, gain access to low-power thin screen technology and get a foot in the door at one of Apple Inc's key Asian display suppliers.
The relatively low-cost deal will leave Samsung with a 3 percent stake in Japan's TV pioneer, making it a leading foreign shareholder alongside chipmaker Qualcomm Inc, which in December agreed to invest as much as $120 million. Shares in Sharp, which was bailed out by its banks last October, jumped on news of the lifeline.
It is also a rare cross-border technology deal between two rival countries and the first time the South Korean TV maker has taken a stake in a major Japanese rival. Japan's three big TV set makers, Sharp, Sony Corp and Panasonic Corp, are struggling to overcome losses as Samsung clobbers them in overseas markets.
Although Sharp is one of Samsung's smallest suppliers, its importance to the Korean company will likely grow as demand for large-screen TVs over 60 inches burgeons, analysts say. Preferential pricing could improve Samsung's competitive edge in TVs.
The deal could also niggle Apple by soaking up capacity at a plant that makes iPad and iPhone 5 screens. Analysts and industry researchers estimate that Sharp is Apple's second-biggest supplier after LG Display Co Ltd.
"An investment by Samsung will also prevent Apple from having exclusive access to Sharp," said Jeff Kang, an analyst at Daishin Securities in Seoul.
Samsung may also benefit from access to the Japanese company's screen technology.
Sharp, which got its start a century ago with mechanical pencils, makes high-resolution indium gallium zinc oxide (IGZO) screens that are thinner than conventional LCDs, require less backlighting, and consume as little as a tenth the power, giving mobile phones and other devices that use them longer battery life.
That could allow Samsung to focus more squarely on an alternative display technology, organic light-emitting diode or OLED screens as thin as a credit card. The company has yet to announce when it will manufacture OLED TVs, which its home rival LG Electronics Inc started selling in February.
Analysts covering Samsung also said it may want to tie up with or even acquire Sharp's solar panel business.
For Sharp, the deal bolsters its chances of survival not only by putting much needed cash in its coffers but by generating new business that will help it to utilize more factory capacity.
"Rather than the amount of investment, it is the partnership with Samsung that Sharp gains that is important," said Tetsuro Ii, chief executive officer of Commons AM, a Tokyo based investment fund.
"Sharp has an opportunity to use the Samsung platform."
The Japanese company has had to slash production of Apple's iPad screens at its Kameyama facility since the start of the year, sources with knowledge of its output plans told Reuters in January, as consumer demand shifts to the iPad mini, for which Sharp is not a supplier.
The deal also comes as a previous agreement for Hon Hai Precision Industry Co Ltd to buy a 9.9 percent stake for 67 billion yen ($720 million) is unraveling, given a steep decline in Sharp's share price and a reluctance by the Japanese firm to cede any management control to the Taiwanese company.
Separate sources told Reuters last month that a bank-backed revival plan for Sharp was unlikely to include a capital infusion from Hon Hai, which last year bought a one-third stake in Sharp's LCD plant in Sakai, western Japan.
That plant is the world's only so-called 10th-generation display factory, which uses bigger sheets of glass that can be cut into large TV screens with less waste and lower cost.
A Hon Hai spokesman said the Samsung deal would not alter his company's cooperation with Sharp and that investment talks were continuing between the two.
Sharp is also relying on a deal with Qualcomm. The U.S. company made an initial investment of half the promised $120 million amount at the end of the year in a private placement of stock, giving the U.S. company a 2.64 percent stake after dilution. Payment of the remainder is conditional on Sharp posting a profit in the six months to March 31, after it reported a 388 billion yen net loss in the previous six months.
Through its Pixtronix subsidiary, Qualcomm said it plans to work with Sharp to develop new power-saving screens based on the company's IGZO technology.
To secure a $4.4 billion bailout last year from banks including Mizuho Financial Group and Mitsubishi Financial Group, Sharp had to agree to trim its workforce by 10,000 and mortgage its offices and factories in Japan, limiting its ability to sell assets other than overseas facilities.
Sharp, which in November said it may not be able to survive on its own, may sell its Chinese TV assembly plant to Lenovo Group Ltd and is in talks to sell its Mexico factory to Hon Hai, according to sources.
A junk rating from credit agencies has also made raising money in the credit markets an expensive proposition for Sharp. Standard & Poor's rates Sharp's debt as B+, a highly speculative grade, while Fitch Ratings has Sharp lower at B-. Moody's Investors Service withdrew its rating on Sharp in April of last year.
Those limited funding options have spurred speculation that Sharp, which has to redeem a 200 billion yen convertible bond in September, will resort to further stock sales.
Yet, any major share offer in the future is unlikely because of dilution worries, said Deutsche Securities analyst Yasuo Nakane. "It will likely meet its refinancing need through a mixture of cashflow generated from profits, capital injections and asset sales," he said.
Sharp's stock closed 14 percent higher at 341 yen on Wednesday, lifted by news that a deal with Samsung, which was announced after markets closed, was imminent. Samsung's stock rose 0.7 percent.
($1 = 93.3500 Japanese yen)
(Additional reporting Reiji Murai in TOKYO; Editing by Edwina Gibbs and Edmund Klamann)