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Toshiba in turmoil

Activist funds flock to Toshiba's massive share offering

Desperate move to stave off delisting may create future challenges

Toshiba shareholders seen heading into an extraordinary shareholders meeting last month.

TOKYO -- Toshiba's decision to raise 600 billion yen ($5.33 billion) through a private share placement has sharply improved the odds of the company avoiding a stock delisting. But the Japanese conglomerate may be giving up management freedom in exchange for offering new shares to dozens of foreign hedge funds.

These include major funds from the U.S., Europe, Asia and Australia, with the largest investor being Singapore-based Effissimo Capital Management. Some well-known U.S. activist funds are also taking part, including Daniel Loeb's Third Point and Paul Singer's Elliott Management.

Better safe than sorry

The embattled Japanese company hopes to sell its semiconductor memory unit by the end of March to avoid ending a second straight fiscal year in negative net worth, and to avert stock delisting from the Tokyo Stock Exchange as per the bourse's rule.

But there is no guarantee that the sale can be completed by then given the dispute with Western Digital and watchdog reviews in various coutries. Raising 600 billion yen in fresh capital will ensure the company avoids this fate.

Toshiba's liabilities currently exceed assets, making a public stock offering a difficult proposition. The company instead opted to offer new shares to foreign institutional investors through a private placement. On Dec. 5, 60 or so investors, consisting mainly of hedge funds recruited by Goldman Sachs Japan, are to make payments and receive their share allocations.

Tough crowd

The hedge funds involved in the new share placement range from traditional stock investment funds and global macro funds to quant funds, commodity trade advisers and distressed hedge funds.

Activist funds, which aggressively use their voting rights to influence corporate decision-making, make up a large portion of the pack. The founders of Effissimo Capital Management include former colleagues of notorious Japanese activist investor Yoshiaki Murakami. With its stake increasing to roughly 11%, the fund will emerge as Toshiba's top shareholder.

A bargain or a speculation?

Toshiba shares dropped 7% before recovering somewhat to end Monday 5.82% lower at 275 yen. But the decline is far milder than 35% dilution due to be caused by the new share issuance.  

The company will use the 600 billion yen to pay down the 660 billion yen in liabilities related to its nuclear power operations in the U.S. By realizing losses, its tax obligations for the current fiscal year will decrease by at least 240 billion yen, lifting its net profit by that amount. 

Thus the capital boost will enable Toshiba to end the fiscal year with 90 billion yen in net worth, instead of 750 billion yen in negative equity. The company will avoid delisting.

Toshiba's market capitalization prior to the capital increase announcement stood at 1.23 trillion yen. Adding the 600 billion yen capital and the 240 billion yen net profit boost gives a theoretical market cap of 2.07 trillion yen. While the number of outstanding shares will increase by 54%, dividing the theoretical market cap with the number of shares still delivers a share price of 319 yen, as opposed to the Monday closing price of 275 yen.

Challenges remain

Over the medium to long term, however, the share price will be determined by Toshiba's earning power. The memory unit generated 90% of the parent's group operating profit for the April-September half. The company will need to present a compelling growth strategy to make up for the void after the sale of the moneymaking unit to keep activist investors happy.

Failing that, those investors are likely to step up pressure on Toshiba's management. Speculative hedge funds may not be so patient. They could simply sell their shareholdings and move on if they do not like what they see.

(Nikkei)

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