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Toshiba in turmoil

Toshiba Memory sale delayed by Chinese antitrust probe

Deadline no longer vital, but objections to cash cow's disposal may grow

As Toshiba has raised enough funds to keep its net worth above zero, some activist investors want it to call off the sale of its money-making memory unit.

TOKYO -- The sale of Toshiba's memory chip arm is stuck in a long-running review from Chinese antitrust authorities, making it unlikely that the deal will close before the end of March as originally planned.

Although meeting the deadline is no longer vital to the parent's survival, the delay could fuel opposition among shareholders against the sale of the money-spinner.

The Japanese conglomerate decided to sell Toshiba Memory in order to plug a hole in its net worth from massive losses at U.S. nuclear unit Westinghouse Electric. On Sept. 28, it struck a deal with a team of Japanese, South Korean and American buyers led by U.S. private equity firm Bain Capital, which quickly sought approval from the Chinese Ministry of Commerce.

A review was launched in early December and is still in progress. By contrast, European and American authorities approved the acquisition promptly, as Toshiba Memory was not being sold to a competitor.

The opinions of Chinese customers such as PC manufacturer Lenovo Group and smartphone maker Huawei Technologies will figure heavily into the probe. Bain has apparently been mediating negotiations on matters such as memory supply volumes and sale prices. "The situation has progressed this month," said a source close to the talks.

But China has given rulings viewed as arbitrary in such matters before. Moreover, the state is working to support semiconductor manufacturing as a matter of national policy -- meaning "defending and cultivating domestic production is one goal for Chinese authorities," according to a lawyer familiar with international judicial affairs. The antitrust probe may be used as a pretext to set conditions on the sale.

The U.S. and China are increasingly at odds over trade matters, with Washington having imposed new tariffs last week on Chinese steel and aluminum products and the Chinese Commerce Ministry announcing countermeasures. As Bain is American, there are concerns that its deal could be affected by trade friction between the two countries.

After finishing the year through March 2017 with liabilities in excess of assets, Toshiba needed to restore its net worth by the end of the present fiscal year or face the automatic delisting of its shares from the Tokyo Stock Exchange. In December, it raised 600 billion yen ($5.7 billion at present rates) through a share offering to ensure its finances would survive even if the sale of Toshiba Memory were delayed.

But though missing the target date no longer poses an existential risk, the sale's delay may draw louder calls to abandon the deal from certain Toshiba stakeholders, such as Hong Kong-based activist fund Argyle Street Management.

Toshiba expects to break even on an operating basis for the year ending Saturday, while it sees the memory business -- which has been removed from the conglomerate's balance sheet -- reaping an operating income of 449.7 billion yen. If the sale is contested at the next shareholder meeting in late June, it could cause a bumpy road for incoming Chairman Nobuaki Kurumatani, whose duties begin next month.

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