While investors cheered the news, analysts are less optimistic.
"I don't see any particular angle that makes Sharp attractive going forward if it plans to sell the smaller sized panel business," Amir Anvarzadeh, director of Japan Equity Sales at BGC Securities, told CNBC on Tuesday. "The firm will not be left with much [after not having] put enough money into research and development because of obvious financial issues."
The LCD unit accounts for nearly one-third of sales, but has come under pressure as of late due to price competition from Chinese manufacturers and domestic rivals like Japan Display.
Sharp, headed for its third annual net loss in four years, is due to announce a broader restructuring plan in May in a bid to secure a bailout from its main lenders Mizuho Bank and Bank of Tokyo-Mitsubishi UFJ. Late last month, Taiwan-based Foxconn, also known as Hon Hai Precision Industry, said it was still exploring investment and partnership opportunities with the debt-strapped Japanese maker.
At the moment, however, experts say the once-iconic company is "running out of options".
"There was supposed to be some sort of rescue plan from Foxconn, which never came, and they've been limping along ever since hoping that the smaller-sized screens will come to the rescue. Now, these are under pressure with prices coming down," Anvarzadeh said.
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Still, the rumored spin-off, should it happen, is a step in the right direction for Sharp, according to Deutsche Securities.
"Splitting the LCD panel business into a separate company would clarify management responsibility and open numerous options for the firm. A 100 billion yen investment would also offer strong support for future investment and R&D," analysts from Deutsche Securities wrote in a note. "So, we believe the split would be positive."
The challenge, however, will be to convince INCJ to come on board especially if Sharp intends to retain a majority stake in the new entity, the note said.
"INCJ will naturally seek an overhaul of assets and the organizational structure before investing, and will want to know how the costs in carrying out structural reform will be borne," Deutsche said. "Sharp's intention of retaining a 51 percent or higher stake after the split may be a problem."