TOKYO -- Westinghouse Electric, Toshiba's bankrupt former U.S. nuclear unit, is being sold to a Canadian investment fund in a deal worth $4.6 billion, giving both the power company and the former parent a chance to recover from massive losses on American reactor projects.
Brookfield Business Partners, a unit of Toronto-based Brookfield Asset Management, will invest $1 billion in return for a roughly 50% stake in Westinghouse and will provide $3 billion in debt financing. Brookfield will also take over obligations including Westinghouse's pension plan.
The buyer aims to complete the purchase by September 2018, pending approval by a U.S. bankruptcy court. Four other teams were also considered likely potential sponsors for a turnaround, including one led by American equity fund Cerberus Capital Management.
Chance to grow
Purchasing Westinghouse will give Brookfield, which primarily invests in the real estate, infrastructure and energy fields, a foothold in nuclear power as demand for it expands overseas. Major emerging nations such as China and India are looking to nuclear to meet their rapidly expanding energy needs.
Westinghouse itself has continued work on four reactors in China, albeit at a slower pace, since declaring bankruptcy last March, even while halting construction on two of the four reactors it was building in the U.S. Massive losses on these American reactors are largely responsible for the company's financial plight. The company has vied for projects in India as well. Successfully cultivating business in emerging markets could enhance its value and help power a financial recovery.
Recent moves by the U.S. government could give Westinghouse a hand in this regard. Secretary of Energy Rick Perry is thought to have pushed American-made reactors, including Westinghouse's, on a December trip to Saudi Arabia. The Middle Eastern country plans to build 16 reactors in the next 20 to 25 years, according to the World Nuclear Association.
Yet Westinghouse will face competition there: Nearly all American nuclear companies have been forced to search for opportunities abroad in the face of a lull at home. Now "is a time of great stress for the nuclear energy industry," CEO Maria Korsnick of the Nuclear Energy Institute said in May 2017. The so-called shale revolution has greatly expanded the use of natural gas in U.S. energy production, and while the costs of renewable power sources such as wind and solar are falling, the cost of building nuclear facilities has soared, due in part to stricter regulation.
Westinghouse's chief challenges, then, are to increase its technological capabilities while becoming more cost-competitive. The company probably has lost a fair portion of its engineers as operations have stalled and the bankruptcy process has begun, an executive at a reactor maker said. And rivals overseas, particularly in China and Russia, excel at offering the low costs clients want.
Manufacturers in those two countries are thought to account for more than 60% of the world's nuclear exports. Under Brookfield, Westinghouse could team up with other manufacturers in the nuclear field in the hope of outcompeting rivals.
Now that Westinghouse has found a buyer, Toshiba will have an easier time cleaning up its own books. The Japanese electronics conglomerate currently holds all Westinghouse stock. But those shares are worthless now that Westinghouse has declared bankruptcy, and Toshiba has removed the U.S. company from its list of consolidated subsidiaries.
Toshiba is now effectively another Westinghouse creditor -- and a major creditor at that. It is looking to sell off claims against 100 billion yen ($883 million) in general Westinghouse debt. And while Toshiba has guaranteed Westinghouse's 660 billion yen in debts to U.S. power companies, it could use some 600 billion yen in fresh funds raised in December to pay off those guarantees, then sell its claim against Westinghouse.
If Toshiba can offload these claims, it will be able to book a steep loss, shrinking its tax bill by at least 240 billion yen -- a critical part of the company's plan to erase negative shareholder equity by the fiscal year-end on March 31, thus avoiding delisting from the Tokyo Stock Exchange. Now that Westinghouse has a turnaround sponsor, selling these claims could be a good deal easier.
But Toshiba's Westinghouse troubles could linger even after the company sells its claims and shares. U.S. residents who helped pay for a stalled-out Westinghouse project through their power bills have launched a class-action lawsuit against Toshiba. A ruling against the company could add to the already extraordinary losses on what once looked to be a profitable investment in the nuclear field.