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Business deals

Mitsubishi Heavy to sell Mitsubishi Motors shares as profit slumps

Industrial machinery maker faces rising jet costs and weak turbine sales

Delays in the development of the Mitsubishi Regional Jet have become a burden for Mitsubishi Heavy.

TOKYO -- Mitsubishi Heavy Industries on Monday decided to sell most of its 10% stake in Mitsubishi Motors, hoping to escape an earnings slump brought on by the long-delayed development of its Mitsubishi Regional Jet and lackluster sales of gas turbines for power plants.

Mitsubishi Heavy will likely sell the interest to fellow group member Mitsubishi Corp. for over 50 billion yen ($454 million), which would make the automaker a Mitsubishi Corp. equity-method affiliate. The proceeds will be used for a restructuring drive designed to refocus the machinery maker's operations.

Mitsubishi Motors was founded in 1970 out of Mitsubishi Heavy's automotive segment. The automaker fell into crisis in the 2000s after it was discovered to be systematically covering up defects, but recovered after Mitsubishi Heavy, Mitsubishi Corp. and the then-Bank of Tokyo-Mitsubishi bought preferred stock in the company.

Following a fuel economy scandal in 2016, Mitsubishi Motors entered into a capital and business partnership with Nissan Motor. Mitsubishi Heavy has since been reducing its stake in Mitsubishi Motors, and now holds about 10% of the automaker's shares, including ownership through subsidiaries.

Meanwhile, Mitsubishi Corp. and the Bank of Tokyo-Mitsubishi UFJ hold 9.24% and 3.26%, respectively, of the automaker's shares. The planned sale would leave the trio's total stake -- roughly 22.5% -- unchanged.

Mitsubishi Heavy is facing serious challenges in its key businesses. Demand for gas turbines is shrinking amid a global shift to renewable energy. Even emerging economies are focusing more on alternatives to fossil fuels after the Paris climate accord entered into effect.

General Electric and Siemens have announced large-scale layoffs in their power businesses. Mitsubishi Hitachi Power Systems, a joint venture between Mitsubishi Heavy and Hitachi, is cutting its workforce at a German facility by 30%, or about 300 employees.

Japan's shipmakers are also under intense pressure from cheaper competition in China and South Korea. Mitsubishi Heavy previously spun off its commercial ship business and is negotiating a partnership with three major compatriots, including Imabari Shipbuilding and Oshima Shipbuilding. Even as one of Japan's best-known shipbuilders and a member of the Mitsubishi group, Mitsubishi Heavy is having trouble surviving on its own.

Its aerospace business is suffering as well. The company has signed memorandums of understanding to deliver 447 Mitsubishi Regional Jets -- Japan's first homegrown passenger planes. But the U.S.-based Eastern Air Lines canceled its order for 20 MRJs and the right to buy 20 more.

Meanwhile, Airbus is investing in Canada's Bombardier's business in smaller jets, while Boeing is mulling a partnership with Brazil's Embraer. Competition is growing even as Mitsubishi Heavy struggles to keep up with its development schedule for the MRJ.

A heavy toll has been taken on Mitsubishi Heavy's earnings. Due to a weak performance in its power systems business, which includes its mainstay heavy electrical machinery, the company in October downgraded its operating profit forecast for the year ending in March by 50 billion yen to 180 billion yen. Return on equity is also expected to drop to the 4% range this fiscal year, far below the 10% target under its three-year plan.

The MRJ has turned into an extremely expensive project as well. After postponing delivery five times, the company has now poured 500 billion yen, more than double its initial estimate, into developing the planes. It has resorted to selling its assets for funding, like unloading stock in a property management company to West Japan Railway for just under 100 billion yen last year.

"Mitsubishi Heavy has almost no synergies with Mitsubishi Motors, and it was a given they would gradually dissolve their capital partnership," a Mitsubishi group official said. Mitsubishi Heavy is now focusing on putting its own operations back on track.

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