February 17, 2017 2:30 am JST

Toshiba reaches crossroads as negative net worth looms

Wounded giant's path forward hinges on chip spinoff

Toshiba President Satoshi Tsunakawa

TOKYO -- Toshiba's proposal to sell a chunk of its memory chip business to stay afloat is proving contentious, forcing the beleaguered conglomerate to explore various options, including a demotion to the second section of the Tokyo bourse.

Staying the course

The top priority for Toshiba, with a write-down of more than 700 billion yen ($6.15 billion) on its nuclear business, is ensuring that net worth returns to positive territory by the end of the fiscal year. The company said Tuesday that liabilities will exceed assets by an estimated 150 billion yen at the close of March if nothing is done. One possible corrective measure is Toshiba's original plan of selling a relatively small piece of its memory chip business by fiscal year-end.

The conglomerate intends to hold an extraordinary shareholders meeting in late March to get a spinoff approved. Once the new entity is established later that month, Toshiba plans to sell less than 20% of it to outside investors. Since the business is said to be valued at 1.5 trillion yen to 2 trillion yen, unloading nearly 20% would likely fetch several hundred billion yen -- enough to plug the hole in Toshiba's balance sheet.

More than 10 companies inside and outside Japan have reportedly expressed interest in buying into the chip business since the possibility of the loss came to light late last year. But the due diligence required raises concerns that the process might not finish by fiscal year-end.

Business as usual

Toshiba's normal business activities could go some way toward filling the gap, and the conglomerate is looking to sell real estate and other assets as well. It had considered parting with shares in group companies, but President Satoshi Tsunakawa told reporters Tuesday that this is off the table. The conglomerate has few standout options for a sale, and a Toshiba insider indicated that even a number of smaller sales would raise only tens of billions of yen.

The memory business is faring well enough that beating the profit forecast by tens of billions of yen would not be out of the question. Toshiba has been conservative with its earnings estimates since the 2015 accounting scandal, suggesting that other businesses may also do better than projected. Though the company's presence on the Tokyo Stock Exchange's watch list makes fundraising on public markets infeasible, a capital infusion by financial institutions could be a possibility.

A trip to the second section

Rather than scramble to meet the March deadline, Toshiba is starting to lean toward shoring up its finances after the new fiscal year begins April 1. Though the memory spinoff will be completed by the end of March, the company is willing to delay outside investment until April or later to allow time to sell a larger stake, possibly even a majority. This strategy aims to maximize the proceeds from the sale by soliciting new offers, even if it takes longer.

But failing to sell at least some of the new unit by the end of March would increase the risk of Toshiba being stuck with negative net worth at the close of the fiscal year, In this case, TSE rules would require the stock's demotion from the first section to the second section, with delisting becoming a possibility if the situation remains unresolved a year later.

Toshiba is nonetheless considering this option because banks are beginning to say that a drop to the second section will have no impact on financing. Banks typically look at net assets, which include noncontrolling interests as well as shareholders' equity, when making lending decisions. Toshiba's net assets are expected to total 110 billion yen at the end of March, even if no capital-boosting steps are taken.

(Nikkei)

Toshiba Corp.

Japan

Market(Ticker): TKS(6502)
Sector:
Industry:
Consumer Durables
Electronics/Appliances
Market cap(USD): 12,209.87M
Shares: 4,237.60M

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