August 10, 2017 1:36 pm JST  (Updated August 10, 2017 5:49 pm JST)

Toshiba memory unit sale by March 'difficult but possible'

Auditor partially approves fiscal 2016 books; negative net worth remains

SHOTARO TANI, Nikkei staff writer

Toshiba, trying to maintain its Tokyo Stock Exchange listing, was able to put one headache behind it on Aug. 10. © Reuters

TOKYO -- Selling its prized flash memory business by the end of this fiscal year will be "difficult" but "possible," Toshiba chief Satoshi Tsunakawa said, as the company continues its struggles to avoid being delisted.

The president's comments came after the embattled conglomerate on Thursday released its final financial results for the year ended in March, with qualified approval from its auditor, PricewaterhouseCoopers Arata.

The final results for fiscal 2016 came in little changed from an outlook the company released in late June. The company reported sales of 4.8 trillion yen ($43.66 billion), down 5.5% from the previous year and unchanged from the outlook. Its operating income came in at 270 billion yen, also unchanged.

By losing a net 965 billion yen for the year, Toshiba ended fiscal 2016 with a negative net worth of 552 billion yen.

Toshiba had been debating with PwC Arata over when the Japanese company realized massive losses on a U.S. nuclear power unit.

The qualified approval by the auditor marks a step forward for Toshiba in maintaining its Tokyo Stock Exchange listing. Toshiba shares carry a special warning from the TSE for inadequate internal controls, and delisting would have grown more likely had PwC Aarata rejected the fiscal 2016 report outright, or issued a disclaimer of opinion indicating it did not receive enough information or cooperation to approve or deny its veracity.

"We believe our financial results have been normalized," Tsunakawa said at a press conference in Tokyo on Thursday.

While the qualified approval gives Toshiba some respite, the company still needs to raise enough funds to avoid remaining in negative net worth for two consecutive fiscal years. If it cannot do so, it faces automatic delisting.

In its financial results for the three months ended in June, also released on Thursday, Toshiba said its net profit came in at 50.3 billion yen, a drop of 36.9% from a year earlier, and its negative net worth fell to 504 billion yen.

Toshiba has been trying to sell off its flash memory unit to escape its negative net worth trap, but progress has been stalled for weeks now. Even if Toshiba manages to agree on a deal in the next few weeks, the sale would still have to be reviewed by antitrust authorities around the world. This could put Toshiba back in jeopardy.

Antitrust reviews in the U.S., Europe and China typically take at least half a year. The sale of Toshiba Medical Systems to Canon last year took nine months to clear antitrust screening despite the lack of direct competition between the companies involved.

"It's true that issues related to antitrust laws are hard, it is difficult," Tsunakawa said. "But I am confident we can conclude a deal before the end of March 2018, and will do whatever necessary toward that goal."

Toshiba's memory business is its cash cow, and questions on whether Toshiba can maintain its competitiveness as a company after selling off the unit have been raised. The corporation's earnings forecast for fiscal 2017, before taking into account the sale of the chip unit, has its storage and device solutions business making up nearly 40% of overall sales.

"The demand for [memory chips] is high at the moment," Tsunakawa said, "but it is a volatile market and we do not know if this will continue. This is one of the reasons we decided to sell [the memory unit]."

The president also added that it is important for the company to stay on the stock market so as "not to cause trouble" to its shareholders and investors.

Foreign investors seem to have confidence in Tsunakawa. Toshiba shares have been on an upward trajectory, rising 9.4% between Aug. 1, when the listing was dropped to the TSE's second section, and Wednesday.

U.S. hedge fund Greenlight Capital, led by David Einhorn, said in July that it added a new long position in Toshiba shares, saying it believes "the stock is worth closer to 400 yen." According to a Japanese securities filing, another U.S. hedge fund, King Street Capital Management, started buying Toshiba shares in June and now owns 5.81% of the company. The leading shareholder is Singapore-based Effissimo Capital Management, with a 9.84% stake.

Toshiba shares ended Thursday's trading up 0.68% at 292 yen.

Toshiba Corp.

Japan

Market(Ticker): TKS(6502)
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Industry:
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Market cap(USD): 12,518.49M
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