May 15, 2017 8:05 am JST

Western Digital takes legal action to block sale of Toshiba's chip unit

Toshiba and Western Digital jointly run chip fabrication facilities in Yokkaichi, Mie Prefecture.

TOKYO (Reuters) -- Western Digital Corp has sought international arbitration to stop partner Toshiba from selling its chips arm without its consent, potentially derailing a much-needed capital injection for the Japanese conglomerate.

California-based Western Digital is a long-standing joint venture partner in Toshiba's main semiconductor plant in Japan. It is bidding for Toshiba chip's business, but is not seen as a front-runner, as its offer has been trumped by Taiwan's Foxconn and U.S. chipmaker Broadcom, according to a source familiar with the matter.

In the early hours of Monday, Western Digital said it had initiated arbitration procedures with the International Chamber of Commerce International Court of Arbitration, demanding Toshiba reverse a move to put its joint venture assets into a hived out entity - Toshiba Memory - and that it stop an all-out sale without consent from Western Digital unit SanDisk.

Toshiba argues that under their joint venture contract, neither party can block a change of control by the other partner. It argues Western Digital itself acquired the joint venture interest when it bought SanDisk, and never sought or received Toshiba's approval.

Western Digital, however, claims that Toshiba is breaching their contract.

"Toshiba's attempt to spin out its joint venture interests into an affiliate and then sell that affiliate is explicitly prohibited without SanDisk's consent," Western Digital chief executive officer Steve Milligan said in a statement.

"Seeking relief through mandatory arbitration was not our first choice in trying to resolve this matter. However, all of our other efforts to achieve a resolution to date have been unsuccessful, and so we believe legal action is now a necessary next step."

A Toshiba spokesman had no immediate comment on the legal action.

Toshiba, battered by billions of dollars in cost overruns at its now bankrupt U.S. nuclear business, is desperately trying to accelerate the sale of its semiconductor business - the world's second biggest NAND flash memory chip producer.

An arbitration process could drag out for months or longer, putting Toshiba's presence on the Tokyo Stock Exchange in jeopardy, as it needs cash from the chip unit sale to bulk up its shareholder equity and stay listed.

The dispute could also derail Toshiba's financing plans, as it hopes to offer the stake in its memory chip unit as collateral for new loans from major lenders, a measure that the lenders say also requires Western Digital's approval.

Shares in the group, which is expected to publish unaudited full-year results as early as Monday, were up 5 percent in early trade, helped by news that progress towards capping its liabilities in the United States was being be made.

The owners of the unfinished Vogtle power plant in Georgia led by Southern Co have to come to a preliminary agreement to cap Toshiba's responsibility for its guarantees on the much-delayed nuclear project at about $3.6 billion, people familiar with the matter said on Sunday.

Toshiba values its chip unit at at least 2 trillion yen. It believes that a consortium of U.S. private equity firm KKR & Co LP and Japanese government-backed investors would be the most feasible buyer for the chips business, sources with direct knowledge said last week.

The Japanese government has proposed that Western Digital join their consortium as a minority investor, but the U.S. company has said it needs to take control of the unit in order to be fully in charge of operations, separate sources have said.

Toshiba Corp.

Japan

Market(Ticker): TKS(6502)
Sector:
Industry:
Consumer Durables
Electronics/Appliances
Market cap(USD): 9,973.72M
Shares: 4,237.60M

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