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Toshiba flip-flops, reconsidering Bain group for memory unit

Differences with Western Digital force struggling company to woo former suitor

TOKYO -- Embattled Japanese conglomerate Toshiba has yet to pick a buyer for its prized flash memory chip unit, clouding the outlook for the company as it reopens talks with a consortium led by Bain Capital.

Negotiations launched in mid-August to sell the memory business to a group led by Western Digital have hit a snag, prompting the struggling company to announce on Wednesday that it will now focus on negotiations with a tri-nation consortium headed by U.S. investment fund Bain Capital, which was the preferred bidder in late June.

But Toshiba will continue talks with Western Digital, its partner in the memory business, due to litigation risks.

Toshiba said it has signed a memorandum of understanding with the Bain consortium -- which includes South Korean chipmaker SK Hynix, Innovation Network Corp. of Japan and the Development Bank of Japan -- to accelerate negotiations to sell Toshiba Memory. 

The memorandum is not legally binding, meaning that the flip-flopping company has yet to target a buyer of its memory unit.

As Toshiba began stepping up negotiations with the Western Digital-led group in mid-August, expectations increased among creditors and the Ministry of Economy, Trade and Industry that it would finally conclude a deal to sell Toshiba Memory.

But Toshiba was unable to iron out differences with Western Digital on a number of issues, including the ratio of the U.S. company's future voting rights at Toshiba Memory.

A Toshiba official cited concerns over regulatory reviews as one of the reasons for its latest tack.

If Toshiba's net worth remains negative for two consecutive years, it will be delisted from the Tokyo Stock Exchange. To avoid this, the company needs to put together a plan by the end of March 2018 that ensures the sale will receive regulatory clearence in China and other countries.

Considering that Western Digital will try to stay involved in management of Toshiba Memory, Toshiba executives possibly concluded that they should not spend any more time in serious negotiations with the California-based company.

It still remains unclear, however, whether Toshiba can avoid risks from Western Digital's lawsuit to prevent the sale should it choose the Bain group. In fact, Toshiba began talks with Western Digital in August because the deal, if concluded, would eliminate risks related to the lawsuit.

According to the latest proposal by the Bain-led consortium, the INCJ and DBJ will not provide funds following the acquisition of Toshiba Memory until the lawsuit is settled. Instead, Apple and Dell will help fund the deal.

Should the lawsuit drag on, the two Japanese partners would be unable to offer funds.

The memory chip plant is owned jointly by Toshiba and Western Digital, but managed by Toshiba. While some Toshiba officials expect that Western Digital will have to drop its lawsuit at some point, others say Toshiba must reach an amicable settlement with Western Digital because the latter's technology is needed to design the chips.

Western Digital expressed disappointment in a statement following Wednesday's announcement.

Adding to Toshiba's woes is that it is under growing pressure to close the deal fast, giving the upper hand to bidders. "We are desperate but they are not," a Toshiba official lamented.

Some analysts think that Toshiba wants to drag out negotiations in the hope of getting a better deal, but time is running out.

Toshiba said on Wednesday that it will "work to expedite the conclusion of a stock purchase agreement by the end of September." But if Western Digital softens its stance, negotiations could take another turn.


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