April 20, 2017 10:00 am JST

Toshiba keeps fighting, but its future looks grim

Embattled giant fails audit as it prepares to sell its memory chip division

Toshiba President Satoshi Tsunakawa at a press conference in Tokyo on April 11 (Photo by Nozomu Ogawa)

TOKYO Toshiba's problems just won't go away. The company failed to get its auditor's approval of a delayed earnings report. The sale of its prized memory chip business is faltering. And wary creditors are casting doubt over future funding. It's definitely not a pretty picture, and if the electronics giant can't turn things around quickly, its troubles could multiply.

APPROVAL DENIED Satoshi Tsunakawa, president of Toshiba, recently said that the company will do its best to stay listed on the Tokyo Stock Exchange. But this is obviously easier said than done, given their spat with auditor PricewaterhouseCoopers Aarata, which refused to approve the twice-delayed, nine-month earnings announcement. This alone does not warrant immediate delisting of Toshiba stock, but an unusual earnings release on April 11 means the company will be closely watched by the TSE.

The announcement also contained Toshiba's first-ever warning about its ability to continue as a going concern. The company's recent massive losses and deteriorating finances may create a hostile fundraising environment, making its future prospects murky at best.

The next hurdle facing Toshiba is its earnings release for the fiscal year ended March 31, due out in May. There is a difference of opinion between the company and PwC over accounting at Toshiba's operations in the U.S. This conflict means auditing for the January-March period may not finish in time, according to Tsunakawa.

Toshiba can submit an annual securities report without an audit opinion. Yet audit committee Chairman Ryoji Sato hinted that the company might switch to a different auditor over the current dispute. "We plan to consider various possibilities going forward," Sato said.

The company faces other issues with the full-year earnings report beyond problems stemming from the postponement. As Toshiba plans its turnaround, it needs to determine how much it will write down on Westinghouse, given the unit's bankruptcy filing. With Westinghouse now under court administration, Toshiba might be unable to get the financial information it requires for the earnings report and audit.

GREAT MEMORY Tsunakawa is relying on the sale of Toshiba's crown jewel, its memory chip business, to shore up the company's crippled finances.

About 10 enterprises participated in the first round of bidding for Toshiba Memory, including other chipmakers and investment funds from the U.S., South Korea and Taiwan. Toshiba, which aims to pick the buyer at its general shareholders meeting in June, has reportedly narrowed the field of suitors to four or five. After talks with each and due diligence, it will hold a second bidding round, wrapping up in mid-May, to choose its preferred negotiating partner.

Toshiba seeks to sell the business for about 2 trillion yen ($18.4 billion) to fill the hole left in its finances by massive losses in its U.S. nuclear operations.

Hon Hai Precision Industry, also known as Foxconn, is believed to have offered about 3 trillion yen. The Taiwanese contract manufacturer of electronics hopes to use the acquisition to move upstream into component production.

Japan's government and business community seem disinclined to stand by idly given the risk of technology outflows to foreign countries. But Foxconn is not to be deterred. Chairman Terry Gou has lobbied his friend Masayoshi Son, chairman of telecom giant SoftBank Group, for indirect support, such as hooking Foxconn up with Japanese financial institutions.

In last year's bailout of Sharp, Foxconn lured the electronics maker away from another suitor at the last second. It is similarly intent on winning over the Japanese this time and may ask Sharp to join the team. The company has already reportedly approached Apple about a joint bid.

That said, Toshiba not only needs to close a deal, it has to do it fast. Any sale must quickly clear antitrust reviews in the relevant countries to ensure the company's net worth is in the black by the end of this fiscal year.

The option least likely to cause problems on this front is a joint bid involving Broadcom, an American maker of semiconductors for telecommunications and other applications. Broadcom and U.S. private equity firm Silver Lake Partners have reportedly offered 2 trillion yen. South Korea's SK Hynix still technically remains in the running, but its No. 5 ranking in the global flash memory market would likely trigger antitrust concerns.

A proposal has also been floated for an all-Japanese consortium of investment funds and companies that did not participate in the first bidding to seek a joint stake.

On top of all this looms Western Digital. The U.S. hard-drive maker, which operates chip fabrication facilities with Toshiba, has argued that the joint-venture contract requires its approval for any sale of the memory business or use of shares of the unit as collateral for bank financing. Because the two share technical information, Toshiba cannot dissolve the venture based solely on its current woes.

LENDERS WARY Though a group of creditors informed Toshiba in March that they will roll over syndicated financing due this month, some regional banks reportedly refused to cooperate, creating uncertainty over future funding.

The syndicate's total outstanding loans to Toshiba dropped below 1 trillion yen at the end of March, marking a roughly 100 billion yen decline in three months.

The total had risen from 798.5 billion yen in September to 1.04 trillion yen in December. Three key lenders -- Sumitomo Mitsui Banking Corp., Mizuho Bank and Sumitomo Mitsui Trust Bank -- increased financing to Toshiba after losses in its U.S. nuclear operations came to light. Existing credit facilities were likely tapped to ensure continued access to funding.

But then Toshiba failed to release earnings for the April-December period for two months, prompting banks to suspend screening for new financing. As loans came due, some regional banks opted not to renew them. One leading regional lender cited a violation of its loan contract with Toshiba. Eleven regional banks lowered their outstanding balances to zero, while six others and six major lenders reduced balances, syndicate documents show.

Internal regulations at banks stipulate that borrowers releasing earnings without an auditor's approval must be downgraded on their risk-assessment scale. A number of banks had done so earlier with Toshiba in anticipation of just such a scenario. The additional reserves these lenders needed to hold in case the conglomerate's loans soured amounted to only a few billion yen -- not enough to weigh substantially on profits.

But Toshiba's inability to release audited earnings has changed the situation, said one major bank, which is considering downgrading the company again. They would treat Toshiba's debt as nonperforming, resulting in losses that could reach some 100 billion yen for the big banks.

For the most part, lenders are not currently scrambling to recover their money by demanding early repayment or reducing Toshiba's available credit. Banks that refused to renew loans have indicated that they want to keep supporting the company, but cannot do anything without seeing full-year results, leaving the question of future funding up in the air.

Toshiba still remains standing. But in light of the giant's ongoing problems, it remains to be seen for how long.

(Nikkei)

Asia300

Hon Hai Precision Industry Co., Ltd.

Taiwan

Market(Ticker): TAI(2317)
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Industry:
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Asia300

SK hynix, Inc.

South Korea

Market(Ticker): KRX(000660)
Sector:
Industry:
Electronic Technology
Semiconductors
Market cap(USD): 41,550.8M
Shares: 728.00M
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