Shares in LG Electronics Inc shares dived 14 percent on Thursday, their biggest daily fall in more than three years, on reports it was planning a $890 million share sale to fund new profit generators, as its core handset business struggles.
The South Korean firm would issue shares worth 1 trillion won ($891 million), online media outlet Edaily quoted an unnamed LG official as saying.
The plan is aimed at beefing up new businesses, rather than cash flow problems, the official was quoted as saying.
An LG Electronics spokesman said he was looking into the report. The Korea Exchange asked LG to clarify by 0900 GMT (5 a.m. EDT).
LG Electronics, the world's No.2 TV maker and third-biggest handset vendor, is seeking to expand into new areas such as solar energy, healthcare and water processing, as its core businesses are deep in the red and the TV operation also has a razor-thin profit margin.
I doubt investors see the new share issue as attractive, said Jeon Nam-joong, a fund manager at Consus Asset Management, which owns LG shares.
When LG's main business is not generating cash, LG is starting new businesses from scratch. The solar market is not in a good mood. Undoubtedly the solar business will grow, but there is uncertainty as leading companies may have an advantage and new technology could emerge.
Koo Bon-joon, the younger brother of the LG Group chairman and a member of its founding family, was brought in a year ago to rescue the troubled mobile business, but he has so far failed to turn around the operation.
LG's handset business recently reported losses for a sixth consecutive quarter, totaling nearly 1 trillion won, as it failed to introduce compelling models to challenge the likes of Apple Inc and Samsung Electronics Co.
A worsening credit outlook in recent weeks has triggered speculation the world's No. 3 handset maker may need to raise equity capital to support the loss-making business.
Ratings agency Fitch this week joined Moody's in cutting the credit outlook on LG Electronics to negative, citing weak operating results and said its operational competitiveness was unlikely to recover significantly in the short term.
S&P also downgraded LG's long-term corporate credit ratings, just as the company is struggling with deteriorating cash flow.
Any new share issue will further depress LG shares, which have lost more than 40 percent this year. The stock is one of the worst performers among global handset makers, along with Research in Motion and Nokia.
LG lost around $1 billion of its market value on Thursday.
A share issue might be a better option from LG's point, since borrowing and issuing debt may turn out to be more costly, said Oh Dong-ge, a senior fund manager at Daishin Asset Management, which owns LG shares.
LG is taking certain risks, and it is betting on an already struggling smartphone business just when the operational environment is not friendly either ... It is hard to say who might be interested in supporting this potential rights offer scheme, but my guess is it would be weak.
LG GROUP SHARES PLUMMET
Shares in parent LG Corp tumbled 10 percent on concerns LG Electronics may place a big chunk of the potential new share issue to the holding company.
LG Corp owns 35 percent of the electronics unit.
Shares in loss-making flat-screen maker LG Display skidded 6.3 percent.
Traders said LG Electronics may be seeking to raise money to prop up struggling affiliates such as LG Display or an M&A deal.
LG Display, which has been posting losses, needs fresh facility investments and LG Electronics as the top shareholder may need to pitch in, said John Park, an analyst at Daishin Securities.
LG Electronics controls around 38 percent of the world's No.2 flat panel maker, which posted a record quarterly loss last month.
LG Display was also recently at the center of a rights offer rumor, which a company executive denied last month in a meeting with investors.
($1 = 1121.850 Korean Won)
(Additional reporting by Ju-min Park; Editing by Jonathan Hopfner and Miyoung Kim)