Hitachi, Japan's biggest electronics conglomerate, is considering selling a stake in its hard disk drive arm to a strategic investor to help it turn the loss-making business around, sources close to the matter said.
The news sent shares of Hitachi , a sprawling conglomerate whose products range from nuclear turbines to washing machines, up 7% to a one-month high in its biggest one-day percentage gain in four years.
Hitachi has not posted a profit in its hard disk drive (HDD) business since buying it from IBM for $2 billion in 2002 due to crumbling prices of disk drives.
"This would mean a sea change in Hitachi. It's about time," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management. "Hitachi should still be able to find a buyer, with HDDs expanding into non-PC markets."
Investment bank Merrill Lynch has already sounded out private equity funds that may be interested in the unit, according to several financial industry sources.
The Carlyle Group, Kohlberg Kravis Roberts, Bain Capital, and Silver Lake are among funds cited as possible investors, the sources said.
Hitachi may seek a fund to buy an equity stake in the hard disk drive business and then work with the fund to help revive it, one financial industry source said.
But it was not immediately clear if Hitachi might also look to unload the entire business.
"The negotiations have just started. It is unclear what the outcome will be," said one source.
Hitachi said it is studying various options, and that it has made no concrete decisions.
Merrill Lynch Japan Securities spokesman Tsukasa Noda said he could not confirm whether the bank was involved in any such deal.
Hitachi shares closed at 750 yen after hitting a high of 760 yen. The benchmark Nikkei 225 average ended up 2.4%.
Hitachi's HDD unit lost $375 million in calendar 2006, a 60% bigger loss from the previous year, hurt by sliding prices for drives as laptop makers turn to flash memory drives for cooler and faster storage.
The Tokyo-based company, which holds a little less than 20% of the global HDD market, trails industry leaders Seagate Technology and Western Digital , which have been profitable despite aggressive notebook computer pricing.
Hitachi has promised its hard drives would be profitable this year, and has said it would close an HDD parts factory in Mexico and cut 4,500 jobs by the end of 2008.
Hitachi has vowed to sharpen its focus to ensure long-term profit growth in the wake of a 33 billion yen group net loss in the past business year.
But Hitachi said on Sept. 14 that it expected its first-half net loss to widen to 35 billion yen on impairment costs after halting plasma display panel production at an older plant.
Its announcement in March that it would sell its stake in Japan Servo to precision motor maker Nidec had fuelled speculation among investors that it might do the same with other struggling units.
"The HDD business has been a drag on Hitachi's profitability," said Okasan Securities analyst Kouichi Fujimoto.
"Even if Hitachi succeeded in making it profitable, it would be doubtful if it would contribute much (to the group's performance)."
Hitachi, which appointed former Western Digital Chief Financial Officer Steve Milligan as CFO of its HDD unit earlier this month, had previously said it had no plans to withdraw from hard drives or from flat TVs. Its TVs have also been losing money due to tough price competition.
Talk of a possible deal involving Hitachi's hard drive business comes as consolidation within the industry gathers pace.
Japanese electronics parts maker TDK agreed earlier this year to take over rival Alps Electric's business in hard drive heads, which are used to read and write data on the disks.
Alps decided to exit the market when orders dwindled from customer Maxtor following its acquisition by Seagate last year.
"Generally speaking, getting rid of loss-making businesses would be positive," Nomura Securities analyst Masaya Yamasaki.
"If the sale goes through, attention will be on how much Hitachi can get."