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Toshiba, Western Digital enter talks on memory sale

Partners seek to move on from bruising legal battle with deal by month-end

TOKYO -- Toshiba has begun negotiations with business partner Western Digital in hopes of reaching an agreement this month to sell its flash memory arm and salvage a vital part of its turnaround plans, it was learned Tuesday.

A consortium including Western Digital, Kohlberg Kravis Roberts of the U.S., the public-private Innovation Network Corp. of Japan and the state-backed Development Bank of Japan has tendered a roughly 1.9 trillion yen ($17.3 billion) bid for Toshiba Memory. The American hard-drive manufacturer would contribute hundreds of billions of yen in funding without initially receiving voting rights. Its plan is to take a stake of less than 20% after the deal clears antitrust reviews.

The Western Digital camp is expected to complete due diligence on the memory unit as early as next week. Toshiba aims to sign a final deal after getting the board's blessing at a meeting this month.

But talks could hit an impasse if the two sides cannot agree on terms.  If negotiations fall through, Toshiba will consider other options to get back on its feet, such as a capital increase.

Western Digital, which invests in chip fabrication facilities in Japan with Toshiba, has locked horns with its partner over the Toshiba Memory sale since the plan came to light early this year. The American company filed a request for arbitration in May seeking to block the sale, arguing that any transfer of the unit without its consent would violate joint-venture agreements. The ensuing legal wrangling has soured relations.

Yet the risk of an injunction against the sale has stymied progress on talks with Toshiba's original preferred bidder, an American-Japanese-South Korean consortium, and Western Digital is starting to feel the impact of the dispute on its chip business. The two sides have been left with little choice but to try burying the hatchet. Western Digital told Toshiba earlier this month that the arbitration request will be withdrawn if a deal is reached.

Toshiba President Satoshi Tsunakawa informed lenders this month that his company will prioritize talks with the Western Digital-KKR team. Representatives from Western Digital arrived in Japan this week and are now holding talks with counterparts from Toshiba and other related parties. Toshiba will likely demand that engineers and other employees be kept on as a condition of any sale.

The DBJ and the INCJ are currently part of the three-country consortium, which also includes Bain Capital of the U.S. and South Korean chipmaker SK Hynix. But they are likely to team up with whichever group offers the best prospects for an early sale, at the behest of the Ministry of Economy, Trade and Industry. The two intend to jump ship to Western Digital's camp if the company reaches an accord with Toshiba.

Once a buyer is chosen, antitrust reviews are expected to take six to nine months. Toshiba hopes to complete the sale within the fiscal year ending March 2018 in order to return its shareholders' equity to positive territory after crippling losses on U.S. nuclear operations -- a must for staying on the Tokyo Stock Exchange.

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