Toshiba Corp and Sony Corp are in talks to combine their units that make small and mid-size LCD panels for smartphones and tablet computers, and may sell a stake in the new entity to the Japanese government for about $1.2 billion, sources said.

The new unit would overtake Sharp Corp as the leading maker of small liquid-crystal display (LCD) panels, and comes as others in the industry have teamed up to tap the burgeoning market for high-tech portable devices.

In addition, the selling of a stake in the unit to the government would help industrial conglomerate Toshiba and consumer electronics giant Sony to focus on their core businesses, industry watchers said.

This should be a good move for both companies since it will allow them to invest more in their core businesses, as well as enjoy a collaboration through the merger of their (non-core) small LCD panel operations, said Nobuo Kurahashi, an analyst at Mizuho Investors Securities in Tokyo.

The government-backed investment fund Innovation Network Corp of Japan is in discussions with the two firms to invest about 100 billion yen ($1.24 billion) for a stake in the entity, the industry sources said on Tuesday.

The Nikkei business daily reported earlier in the day that stake could be as high as 80 percent.

The new company may use the funds to introduce cutting-edge production lines at a Sony plant in Aichi Prefecture's Higashiura, and will develop technologies to mass-produce OEL (organic electroluminescence) panels, which deliver higher resolutions than LCD panels while consuming less power, the paper added.

Toshiba and Sony will aim to list the joint LCD panel business, the sources added.

Toshiba and Sony are seeking a basic agreement this month and the entity is expected to be formed later this year, the Nikkei said.

Representatives from both Toshiba and Sony declined to comment on the matter.

SMALL SCREENS

Toshiba Mobile Display Co had 9.2 percent of the global small LCD panel market in 2010 while Sony Mobile Display Corp had 6.1 percent, behind top-ranked Sharp's 14.8 percent share, according to research firm iSuppli.

Increasing demand for smaller panels used in popular devices such as Apple's iPad and iPhone last week led Sharp to forecast an unexpected jump in operating profit for its current business year.

Sharp also said at the time it would source mid-sized panels from cost-competitive alliance partners in China and Taiwan.

Analysts expect global tablet sales to soar to more than 50 million units in 2011. Apple boasts 80 percent of the market, but it is attracting many new entrants.

Shares of Toshiba were up 1.5 percent at 403 yen at the mid-day break, versus an essentially flat Nikkei benchmark.

Shares of Sony were down 2.1 percent at 2,018 yen at the break, which market players attributed to reports of another break in by hackers on its computer system.

($1 = 80.280 Japanese Yen)

(Additional reporting by James Topham and Ayai Tomisawa in Tokyo, Arpita Mukherjee in Bangalore; Editing by Chris Gallagher and Muralikumar Anantharaman)

China Smartphone Sony