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Toshiba rebounds to record net profit and saves stock listing

Fate of crucial chip memory unit hangs in balance with 3 possible scenarios

Toshiba needed to pull itself out of negative net worth to stay on the stock market.

TOKYO -- Embattled Japanese conglomerate Toshiba on Tuesday reported a sharp earnings turnaround for the year ended March, logging its first net profit in four years and, crucially, a return to positive net worth.

In a separate announcement, the company said it intends to proceed with a 2 trillion yen ($18.26 billion) deal to sell its prized flash memory unit, Toshiba Memory, to a consortium led by management consulting firm Bain & Co.

Toshiba, which looked to be in danger of collapsing as recently as last year following the bankruptcy of U.S. nuclear unit Westinghouse Electric, posted a record net profit of 804 billion yen, compared with a loss of 965.6 billion yen a year earlier.

Toshiba said the sale of Westinghouse-related assets and a reduction in tax payments contributed to the record figure. Sales dropped 2.4% to 3.9 trillion yen, while operating profit decreased 22% to 64 billion yen.

For the current fiscal year, the company expects a 33% surge in net profit to 1.07 trillion yen. Sales are projected to fall 9% to 3.6 trillion yen.

Toshiba reported a positive net worth of 783.1 billion yen, reversing the year-earlier deficit of 552.9 billion yen. The rebound -- thanks to 600 billion yen worth of capital fundraising last year, as well as the improved business performance -- ensures the company can remain listed on the Tokyo Stock Exchange.

In the separate announcement on structural reforms, Toshiba said it plans to invest proceeds from the planned sale of Toshiba Memory in priority areas, such as batteries, auto parts and infrastructure businesses. The company also plans to strengthen development of software for data analysis and others.

But the company is seeing a stalled regulatory approval process in China ahead of a May 28 deadline to sell Toshiba Memory to the Bain-led consortium. The proposed sale has already received a green light from antitrust authorities in Japan, the U.S. and other countries. The delay of the approval in China has fueled speculation that Toshiba might explore alternatives to a sale.

The three possible scenarios for Toshiba's memory chip unit, which could significantly affect the company's restructuring, include the sale as originally planned; an approval extension and reapplication; and an initial public offering.

While the second scenario is seen as unlikely, the possibility remains that Chinese regulators could extend the review deadline and allow Toshiba to reapply for the sale of its memory chip unit.

In that case, Toshiba and the Bain-led consortium would first analyze the hurdles of Chinese regulatory approval and how the parties could resolve the matter. If the issues are cleared quickly, the parties would move ahead to sell the unit as agreed. 

The acquisition contract with Bain allows Toshiba to terminate the sale on and after April 1, but only with consent from the partner. A unilateral attempt to withdraw from selling the unit could result in litigation. 

If a quick solution at passing the review process remains elusive, the parties would likely agree to terminate the purchase agreement.

It remains unclear why regulatory approval in China has been delayed, and under such circumstances it is difficult to predict how long the review could take. Further delay of the approval would likely dilute the value of the memory business itself, and neither Toshiba nor Bain would stand to benefit. Sources familiar with the matter said they do not expect the parties to reapply for the sale.

An initial public offering of the memory unit is seen as Toshiba's most likely step if it cancels the sale.

Financial institutions that have helped Toshiba dig itself out of its crisis believe that the company lacks the investment capabilities needed to survive with the chip business. 

Issuing additional stock to increase its capital is a stopgap option, but the company is more likely to launch an IPO with the aim of raising a large amount of funds. It generally takes about a year for a listing to be completed.

The biggest risk factor is the condition of the memory market. As a result of the slump in smartphone sales, prices for NAND flash memory, Toshiba Memory's business, are on a downward trend.

A protracted screening process for listing due to possible snags in the compliance system or other problems could risk putting a dent in the amount of funds that could be raised through an IPO.

"We are not getting negative talk from Chinese authorities," regarding the sale of Toshiba Memory, Nobuaki Kurumatani, Toshiba chairman and CEO, told reporters and analysts on Tuesday. 

His remarks came after the company said it expects to book a 970 billion yen profit from the sale of the chip unit in the current fiscal year. Kurumatani said he expects the deal to go through, and that the company will invest the proceeds for future growth.

Toshiba will still retain a roughly 40% stake after the sale. Kurumatani said the company is still considering whether to further sell down its stake.

He said the memory-chip industry "will not be such a weak market" over the medium to long term, on the back of rising demand from data after the rollout of the 5G wireless network.

Wataru Suzuki, Nikkei staff writer in Tokyo contributed to this story.

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