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Written by: Staff

OSAKA, Feb 24 (Reuters) Shareholders of struggling Japanese electronics maker Sanyo Electric Co. approved a $2.6 billion issue of preferred stock on Friday, enabling the company to receive a much-needed cash infusion but raising the prospect that share value will be reduced by roughly two-thirds.

The issue alleviates a near-term funding problem for Sanyo, which embarked on sweeping restructuring last year after earthquake damage to a chip factory and sluggish sales of home appliances and televisions pushed it deep into the red.

It is also the second piece of good news in a little over a week for Sanyo, coming on the heels of a deal with Finland's Nokia to jointly develop and produce mobile phones.

But Sanyo still faces several hurdles in its revival. It has yet to name a partner for its ailing TV division, and its home appliance and chip operations continue to lose money that could be flowing to its battery business and other pockets of strength.

''We are asking for one more chance,'' Sanyo President Toshimasa Iue told an extraordinary shareholders' meeting in Osaka attended by over 2,000 shareholders, some of them irate. ''We are confident we can turn things around.'' Iue began the meeting by bowing deeply and apologising for the company's downturn, which has forced it to issue 300 billion yen worth of preferred shares that can be converted to common stock at 70 yen, about one-fourth the current price.

At the end of the three-hour meeting, Iue announced that more than two-thirds of the votes were cast in favour of issuing the new shares to Goldman Sachs Group Inc., Daiwa Securities SMBC and Sumitomo Mitsui Banking Corp.

The deal will make Daiwa Securities SMBC, the investment banking arm of Daiwa Securities Group Inc., and Goldman the two top shareholders. Sumitomo Mitsui, a unit of Sumitomo Mitsui Financial Group (SMFG), is Sanyo's main bank.

Shareholders also approved seven new board members including two each from Goldman and Daiwa SMBC, and Koichi Maeda, who left SMFG to become a vice president at Sanyo last year. This will give the financial institutions a majority on Sanyo's board.

Maeda tried to appease concerns that Goldman and Daiwa SMBC were only interested in short-term profits and were looking to break up Sanyo into sellable parts by explaining that they have promised to remain stable shareholders over the next three years.

Kenichi Kondou, who bought stock over 10 years ago, said he was willing to give the new directors the benefit of the doubt.

''What is in the past is done. It is history,'' said Kondou, 70, who took the morning off work to attend the meeting. ''I hope the new directors coming from the outside can help Sanyo recover and contribute to its growth.'' FIRST STEP Sanyo shares, weighed down in morning trade by investor worries that the issue would not be approved, recovered ground after the announcement and closed unchanged at 285 yen. The benchmark Nikkei average also ended the day flat.

Sanyo's share price has roughly halved in value over the past two years.

Many brokerage analysts remain bearish on Sanyo's stock due to the prospect of dilution and because they are not confident management can come up with a viable solution for its struggling semiconductor, TV and home appliance operations.

As an example of progress, Iue told the meeting about Sanyo's recently announced plans to liquidate its organic light-emitting diode display operations. Sanyo had been trying to sell the business but was unable to find a buyer at the right price.

''The share issue is really just a first step, an indispensable step, in the recovery process. The big question now is what is it going to do with the chip, TV and appliance businesses,'' said Mizuho Securities senior analyst Koichi Hariya.

''Nokia partnered with Sanyo in mobile phones because it saw merit in that move, but I wonder if it will be able to form alliances or find buyers for its other businesses, as the value of those assets are not as clear,'' he said.

In addition to boosting its financial health -- Sanyo's shareholder equity ratio was set to hit a relatively low 4 per cent this business year without the issue -- Iue said Sanyo needed money for research and capital investment in its promising areas such as rechargeable batteries and solar cells.

The stock will be issued to the financial institutions at 700 yen per share, with the option of exchanging each preferred share for 10 common shares. If all are converted, the move would more than triple Sanyo's outstanding stock to 6.16 billion shares.

Iue and Maeda emphasised that there were some restrictions on share conversion to limit dilution in the near term. For example, conversion of type-A preferred stock will not be allowed for a year from issue next month.

But several shareholders were dissatisfied with the explanation and grilled Iue and other executives for agreeing to sell the stock on such favourable terms. Some shouted abuse and there was a suggestion that management resign.

Some drew laughs from the audience with their remarks.

''Why don't you issue stock at 70 yen to existing shareholders?'' one complained.

($1=117.02 Yen) REUTERS SD PM1910

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