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Toshiba memory unit sale goes into extra time

US-China trade troubles hang over Beijing's antitrust approval of deal

A group led by Bain Capital of the U.S. is set to buy Toshiba's valuable flash memory operations.

TOKYO -- Toshiba's failure to close the sale of its lucrative flash memory business by the end of March looks likely to embolden a group of shareholders opposed to the deal, even as some worry that trade clashes with the U.S. could prompt Chinese authorities to block the transaction.

The Japanese industrial conglomerate agreed last September to sell Toshiba Memory to a consortium led by U.S. private-equity firm Bain Capital. Toshiba's lender banks, which provided financial support to the group after was laid low by losses in its U.S. nuclear power businesses, remain intent on seeing the transaction through.

But as of Friday, "certain conditions relating to required antitrust approvals" had yet to be met, Toshiba said. The deal is now expected to close in "April 2018 or later." It had been aiming for the end of March.

The delay was to some degree expected, a source on the buyer side said. Chinese regulators began an antitrust screening of the sale in early December, and the process typically takes four months.

"We see no problem with the screening itself," Toshiba President Satoshi Tsunakawa said Thursday, adding that the company would simply wait for the result.

Selling Toshiba Memory had been seen as essential to keeping Toshiba from ending a second consecutive fiscal year with negative shareholders' equity, a state that would trigger a delisting from the Tokyo Stock Exchange. A 600 billion yen ($5.65 billion) capital increase last December averted that risk.

That round of fundraising brought in a number of activist investors, including Daniel Loeb's Third Point, some of whom apparently want the memory unit sale to be called off. Scrapping the deal could send Toshiba's share price soaring, giving these investors a prime chance to sell out.

Other circumstances have cast doubt on whether the deal will be able to close. Trade friction between the U.S. and China has raised questions about whether Beijing will sign off on a deal that benefits one of America's top private-equity funds.

U.S. President Donald Trump has called for punitive import tariffs on up to $60 billion of Chinese goods in response to what his administration calls Chinese theft of U.S. technology.

And the deal revolves around semiconductors, an industry that China is trying to build up on its own soil to reduce the country's dependence on foreign chipmakers. Industry and government voices in Japan had expressed concern early on in the search for a buyer when confronted with the possibility of Chinese investment in the Toshiba unit.

Earlier optimism over Chinese antitrust approval has given way to a sense that "we really don't know what will happen," a person familiar with the matter said.

Toshiba continues to defend the sale, saying the memory operations' steep investment requirements and the risk of market swings are too much for one company to handle. Yet this business provides 90% of Toshiba's operating profit. In classifying it as discontinued, Toshiba cut its operating profit forecast for the year ending March 31 to zero.

Toshiba's creditor banks see the memory unit sale as a way to recoup the credit line they extended the company. With Toshiba still on shaky financial ground, these lenders are disinclined to let the sale fall through.

But the contract Toshiba and Bain have signed does allow Toshiba to back out of the deal after April under certain conditions. Bain itself can walk away starting in July.

And while neither side can cancel the agreement unilaterally, a number of uncertain factors, from U.S.-China tensions and the state of the memory market to extended delays in antitrust approval, could convince both to look for alternative options. The Financial Times reported in January that Toshiba was considering an initial public offering of the memory unit in the event that the sale does not win antitrust approval.

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