Japan's Fuji Heavy shares rally on expanded alliance with Toyota group

Thomson Financial News
Japan's Fuji Heavy shares rally on expanded alliance with Toyota group
04.11.08, 2:04 AM ET

TOKYO (Thomson Financial) - Shares in Fuji Heavy Industries Ltd. surged in morning trade on Friday after the company said Toyota Motor Corp. will raise its stake in the maker of Subaru cars to 16.5 percent from the current 8.7 percent by purchasing existing shares from Fuji Heavy.

The purchase of an additional 61 million Fuji Heavy shares will cost Toyota (nyse: TM - news - people ) an estimated 31.1 billion yen ($309.8 million), or 510 yen per share, the companies said.

At 1:40 p.m. (0440 GMT), Fuji Heavy shares were up 11.5 percent at 445 yen.

Toyota was : Toyota is up 1.7 percent at 4,910 yen.

The Nikkei 225 index was up 347.67 points or 2.7 percent at 13,292.97.

Fuji Heavy plans to use the sales proceeds to build an assembly plant in Gunma Prefecture, which will produce compact sports cars, featuring Fuji Heavy's boxer engine, and other vehicles for not only its own brand but also Toyota's, the company said.

Fuji Heavy will terminate the production of minicars at its outdated main plant in Gunma, while Toyota and Daihatsu Motor Co., Toyota's subsidiary, will supply compact and minicars to Fuji Heavy.

Goldman Sachs (nyse: GS - news - people ) raised its rating on Fuji Heavy to 'neutral' from 'sell' on the announcement, citing the likelihood of expanded ties with the Toyota group to help the company improve its earnings.

'At least, we think the announcement of greater collaboration with Toyota and the transfer of the entire minicar business to Daihatsu shows a clear concentration of management resources on Fuji Heavy's core operations, and lays out a roadmap for improving profitability in the future,' Goldman Sachs analyst Kota Yuzawa said in a note to clients.

'Still, neither of these measures is likely to produce a sizeable earnings contribution over the next one or two years,' he said.

Another analyst, who requested anonymity, doubted the advantage of the deal for Fuji Heavy.

'I don't really see the deal as a buying incentive for the shares of Fuji Heavy or Toyota. Fuji Heavy's plans, including those to withdraw from minicar production and to buy compact cars from Toyota, make the company look as if it's trying to eventually become a mere subcontractor of Toyota,' he said.

'I don't see much gain for Toyota from the deal, as it is capable of making whatever it wants without borrowing Fuji Heavy's resources,' the analyst said.

yumiko.nishitani@thomson.com

yun/nt

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