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Toshiba to repay shareholders with buyback

Embattled conglomerate keen to shed burden of activists’ generosity

The sale of Toshiba Memory has provided some much needed capital for the embattled Japanese conglomerate.    © Reuters

TOKYO -- Toshiba has announced plans to buy back shares worth about 700 billion yen ($6.33 billion), potentially under pressure from activist shareholders.

Having clawed its way back from the brink of being delisted, the Japanese conglomerate now has a net worth of nearly 2 trillion yen, thanks to a capital increase and the sale of its flash memory unit. But the shareholders that took a risk on the company need to be paid back.

Yet, Toshiba cannot expect its share price to continue rising unless it works out an investment strategy for medium- to long-term growth.

The company's stock began to rise sharply following announcement of the buyback on Wednesday morning and surged to a year-to-date high of 351 yen, up 11% from its close on Tuesday, before finishing 7% higher at 337 yen.

The stock had been hovering around the level of its closing price the previous day prior to the announcement, which stated that proceeds from the sale of Toshiba Memory would be used to finance the program. 

The level at Wednesday's close, however, is less than 70% of the stock price before the exposure in 2015 of the accounting scandal that engulfed the company.

On the other hand, it represents a rise of around 30% from 263 yen, the level at which new shares were issued to about 60 companies to raise 600 billion yen in December last year.

Many of the overseas funds that accepted the shares are activists who are well known for expecting quick returns on their investments, and making their demands known.

Among them are Effissimo Capital Management, established in Singapore by former colleagues of the aggressive activist investor Yoshiaki Murakami, as well as American funds Elliott Management and Cerberus Capital Management.

While most companies would avoid issuing new shares to activist investors under normal circumstances, Toshiba had no choice as it had been struggling with a negative net worth of more than 500 billion yen.

The company managed to agree a deal last September to sell its prized flash memory unit to a consortium of Japanese, U.S. and South Korean concerns. At the time, however, it was delayed due to a lengthy review by Chinese antitrust authorities.

Had the sale not gone through in time, Toshiba would have been delisted at the end of March this year due to a second consecutive year of negative net worth.

The 600-billion-yen investment, if calculated at Toshiba's closing price on Wednesday, is worth 770 billion yen. The investors have thus earned a total of 170 billion yen in just half a year.

As Toshiba prepares for its general shareholders meeting on June 27, there are signs that the board is coming under increasing shareholder pressure.

Market players were left puzzled by a letter dated May 28 allegedly sent by Argyle Street Management, a Hong Kong-based fund, suggesting that Toshiba should not keep cash on hand to prepare for future mergers and acquisitions.

A day later, U.S. fund King Street Capital Management said in a report to the Japanese government that it had changed its purpose for holding a stake of around 5% in Toshiba from "pure investment" to "making important proposals as occasion demands."

A Toshiba executive denied that the buyback plan comes as a result of pressure from investment funds. "It is a common-sense option laying weight on both the return of benefits to shareholders and growth strategies," he said.

A capital increase of 600 billion yen and a share buyback of 700 billion yen combined would appear highly unusual steps to take as emergency measures.

The buyback is aimed at keeping repurchased shares as treasury shares for future mergers and aquisitions through equity swaps, according to the executive.

Toshiba has attributed the timing of the announcement to the delay resulting from the Chinese antitrust review.

But the buyback program cannot be carried out before proceeds from the sale of the memory unit are actually taken into account because its profit available for dividend payments, as defined by the Companies Act, remains in negative territory.

Toshiba Chairman and CEO Nobuaki Kurumatani visited more than 30 major shareholders in Boston and New York in early June, knowing that their generosity came at a price.

All eyes will now be on whether the company can secure growth after selling its cash cow.

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