LONDON – Struggling Japanese chip company Renesas Electronics Corp. has announced it has agreed two deals to provide funds for the company in both the short and long term. Both deals were set to come into effect on Monday (Oct. 1) and appear to have preserved the independence and ownership structure of the company. However, they are set to trigger substantial lay-offs at Renesas and retreats from manufacturing and certain markets.
One long-term deal is a guarantee deposits agreement with Renesas stake holders NEC Corp., Hitachi Ltd. and Mitsubishi Electric Corp. and a syndicate loan agreement with Renesas' main financing banks to implement financing totaling 97 billion yen (about $1.25 billion). These agreements secure the funds for a previously announced structural reform of the company.
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Renesas, which has been loss making for many quarters, has been trying to raise about $1.3 billion to execute a rescue plan that involves laying off about one third of its workforce and closing more than half its domestic manufacturing sites.
The second deal is a syndicated long-term loan of 161.1 billion yen (about $2.1 billion) being arranged with Renesas bankers Miziho Corporate Bank Ltd., Bank of Tokyo-Mitsubishi UGJ Ltd., Sumitomo Mitsui Trust Bank Ltd. and Mitsubishi UFJ Trust and Banking Corp. The banks have agreed to arrange a fund that can be used to restructure the first loan and stabilize the Renesas financial base.
Renesas states in a press release that with these financial arrangements in place it will accelerate business, financial and product offering reforms to reach profitability goals with a reduced fixed-cost base. Renesas said it intends to be a company that consistently achieves an operating profit ratio of more than 10 percent.
Renesas' struggle to raise cash for the reform led reportedly to talks in recent weeks with New York based private equity firm Kohlberg Kravis Roberts & Co. It has also been reported that a Japanese consortium including Toyota, Panasonic and a Japanese government-backed fund called the Innovation Network Corp. of Japan was looking to invest to acquire a majority stake in Renesas by the end of 2012.
Renesas, created from the chip making interests of Hitachi, Mitsubishi Electric and NEC, started trading in its present form on April 1, 2010. However, the company has been loss making since formation. For the full fiscal year ending March 31, 2013, Renesas has predicted a net loss of 150 billion yen (about $1.91 billion) on sales revenue of 883.1 billion yen (about $11.3 billion).
I wonder what investment rationale these Japanese banks see in lending more money to Renesas. The core issue faced by Renesas is not money. Core issues are the capabilities of the current management team and their intentions of turning around the company. As I have said earlier also, the current toxic management is actually a bunch of veteran engineers without any experience of running a large public listed company. You will realize their mediocrity after talking to them for just 10 minutes. Other issue is whether they have any genuine intentions of turning around the company. Most of them just want to float around for some more time, collect their retirement money, and go home. Unless these core issues are resolved, I do not see any hope for Renesas. KKR had realized these core issues and therefore they have put a condition that they will fire the entire board if they take over the management.