Troubled Toshiba faces steep climb to recovery
Shares plunge 13% on fears of potential delisting; chip unit sale, skeptical banks testing management's mettle
TOKYO -- Withdrawing from the overseas nuclear business that precipitated Toshiba's current crisis marks just one step down a difficult road for the beleaguered giant, which has numerous hurdles to clear within only a few months.
Listing at risk
The Tokyo Stock Exchange branded Toshiba a "security on alert" in September 2015 in the wake of an accounting scandal, aiming to warn investors about internal management issues. The designation was extended last December following another review.
The industrial conglomerate will submit a new report on internal controls Wednesday. Japan Exchange Regulation, the watchdog arm of Japan Exchange Group, will launch a full-scale review based on the report to decide its fate. Should the company again fail to win the bourse's approval, its shares will be delisted.
The review process is nearly as strict as for prospective new listings, looking at such points as accounting and information management. Past probes have taken four months in some cases for companies whose watch-listed status was extended as Toshiba's has been. Some see that review possibly taking half a year, given the company's size and repeated delays of earnings announcements.
"If we decide to cancel Toshiba's designation too readily, it'll set a bad example for other companies working hard to improve their governance," a TSE insider said.
The ambient uncertainty has put off some investors. Though Toshiba shares rallied Tuesday, they were down nearly 9% at one point on news of plans to postpone releasing April-December earnings a second time amid an investigation into internal oversight issues at nuclear unit Westinghouse Electric.
"We can't consider [Toshiba] as an investment target when there's a possibility of delisting," said Fumio Matsumoto of Dalton Capital (Japan). Toshiba's shares plunged more than 13% on Wednesday afternoon. As the company faces a possible delisting, individual investors seem to be selling the shares.
Whether Toshiba can fetch the price it expects for its chip operations also remains an open question.
The conglomerate will on April 1 spin off the business into a separate company, to be named Toshiba Memory, and begin talks to sell some or all of the shares. Toshiba could fetch a price of 1.5 trillion yen to 2 trillion yen ($13 billion to $17.4 billion), which it plans to use to plug the hole in its finances from a massive impairment charge on overseas nuclear operations. President Satoshi Tsunakawa told reporters Tuesday that Toshiba hopes to decide on the sale as early as possible next fiscal year.
The sale itself should not be difficult. Toshiba ranks second in the global chip market, with a particular edge in such areas as smartphone chips. The business is a cash cow, raking in a 110 billion yen operating profit last fiscal year. Several companies have expressed interest in participating in the first bidding round set to end March 29, including American hard-drive manufacturer Western Digital and South Korean chipmaker SK Hynix.
The problem is that this enviable performance may not last with smartphone sales slowing sharply worldwide. A major investment firm expressed reservations about tendering a high bid in light of the industry outlook.
Toshiba will also need to navigate tricky political waters as it chooses a buyer. "It would be a problem if technology and talent were to flow out of the country," warned Sadayuki Sakakibara, chairman of the Keidanren business lobby.
Nuclear unit Westinghouse Electric is another source of uncertainty. Toshiba plans to pursue drastic reform of the company, with a Chapter 11 bankruptcy protection filing on the table. But the U.S. government has guaranteed $8.3 billion in lending for one of the nuclear projects Westinghouse is working on that led to Toshiba's financial meltdown.
"There's a lot that Toshiba and Westinghouse won't be able to decide alone," a senior Toshiba official said.
Toshiba's blunders have left banks feeling skeptical about the conglomerate, which could have consequences for future financing.
Toshiba will hold a briefing Wednesday to explain the latest earnings delay and seek banks' cooperation on fundraising next fiscal year and beyond. This will mark its third such meeting for lenders since the nuclear-related write-down came to light late last year. Though banks agreed earlier to continue supporting Toshiba until fiscal year-end, funding beyond that point will hinge on how future talks go.
The two earnings delays have spurred even such major lenders as Mizuho Bank and Sumitomo Mitsui Banking Corp. to express serious concern about Toshiba's future. The conglomerate could face more widespread criticism at the briefing.
A key question going forward is how banks will rank Toshiba on a five-tier borrower risk scale. Mizuho downgraded it a step in January from "normal" to "needs attention," the second rank on the scale. SMBC and Bank of Tokyo-Mitsubishi UFJ had intended to wait until nine-month earnings came out to decide whether a downgrade from "normal" was in order, but the latest delay may push them to rethink this stance.
Cutting Toshiba's rating to the third tier or below would require banks to treat loans to the company as nonperforming, forcing them to build up substantial reserves and making new financing tougher. This could crimp its turnaround plans.
If regional banks start withdrawing support, larger lenders will need to pick up the slack. How long they remain united behind Toshiba remains to be seen.