Sanyo troubles hit Goldman Sachs

Allegations of fraudulent accounting wiped more than a fifth off the value of Sanyo yesterday, just weeks before Goldman Sachs was expected to cash in a giant profit on its stake in the troubled Japanese electronics firm.

Goldman, the world's largest investment bank, led a Y300bn ($2.5bn) bail-out of Sanyo last year and had been free to sell its stake from 14 March.

But Sanyo shares fell 21 per cent after the company said Japan's stock market regulator was examining whether it had manipulated accounts to pretend it was making a profit in 2004, when in fact it had plunged into the red. Sanyo, which started as a maker of bicycle lights in 1947 and grew to become one of the most recognisable names in electronics, has been losing money ever since. Cheaper Chinese rivals are driving down the price of digital cameras, mobile phones and microchips, and the company has been forced into a painful restructuring that includes a management shake-up and 14,000 job cuts.

"We are co-operating with the investigation" by the Securities and Exchange Surveillance Commission, Sanyo said in response to a news report in Japan.

The Asahi newspaper reported that the company had understated losses at seven subsidiaries for the year ended March 2004, by refusing to write down asset values. If it had done so, the newspaper alleged, the group as a whole would have shown a loss for the year instead of the small profit it produced.

The allegations are serious for Sanyo since they come at a time when Japan's regulators are clamping down on accounting irregularities.

It is also a serious blow to Goldman Sachs, for whom its Y125bn investment in Sanyo was its biggest investment in Japan in three years and one of its biggest ever. The preferred stock bought by Goldman and its co-investors, Daiwa Securities and Sumitomo Mitsui Financial, was exchangeable for Sanyo shares and available for sale to third parties from the middle of March. Market rumours had suggested they were likely to sell at least part of the holding, particularly since Sanyo shares had rallied more than 50 per cent since late last year. Yesterday, though, Goldman said it was "committed to supporting the company for the long term".

Fitch Ratings put Sanyo's "BB+" credit rating on negative watch. "Although the agency believes that any negative cash flow impact on the company resulting directly from the investigation may not be material, a negative outcome from the investigation would probably result in a further weakening of Sanyo's brand equity and its operating performance," Fitch said.