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Toshiba in turmoil

With deadline looming, Toshiba waits for China clearance of memory sale

Japanese conglomerate prepares plan B amid Sino-American trade tensions

Toshiba may call off the sale of flash memory operations if Chinese antitrust regulators do not give the green light by late May, instead electing to take the valuable unit public. (Photo by Takuya Imai)

TOKYO -- Toshiba is debating what to do with its flash memory business if Chinese antitrust authorities do not approve a sale to a U.S.-led consortium by late May, raising the possibility of revamping the sale agreement or listing Toshiba Memory.

The Japanese electronics conglomerate agreed last September to sell Toshiba Memory for 2 trillion yen ($18.5 billion) to a consortium led by American private-equity fund Bain Capital, anticipating the deal to close by the end of March. But Toshiba has now told main creditor banks that other options are under consideration.

Chinese antitrust authorities began examining the deal in early December and have taken a good deal more time than expected. A final decision is now due by May 28.

Should the authorities give the green light, the sale will most likely proceed as planned. This would be the best-case scenario for everyone. Bain takes charge of Toshiba Memory's management, and Toshiba gets a hefty sum to invest in growth. The company would retain a roughly 40% stake, with plans to reduce it later.

If approval is not forthcoming in time, Toshiba will have a choice to make. One option would be to revamp the deal after May and resubmit it for screening in the hope that regulators look more favorably on the second version.

Bain has the right to walk away from the deal, for a 10 billion yen fee, starting in July. Talks to revise the sale agreement would hinge on the state of the memory market. Smartphone sales are on the wane globally, foreshadowing a downturn in demand for memory chips. Bain could use a softer market to extract a lower price for Toshiba Memory.

Toshiba Memory's Yokkaichi flash memory plant in Japan's Mie Prefecture. With smartphone sales flagging globally, memory chip demand could take a hit.

The participation of SK Hynix, a minority partner in the Bain-led consortium, could also come under question. China is concerned to see a South Korean chipmaker involved in the purchase at a time when Beijing looks to turn chipmaking into a core domestic industry. Bain holds contractual responsibility for shepherding the sale through antitrust screening in various countries and so could be forced to shake up its own team to please Chinese regulators.

Even if a revised agreement makes it to regulators' desks, "approval could take a year to obtain" in light of Sino-American trade frictions, a source close to the matter said. With the U.S. blocking in March the purchase of chipmaker Qualcomm by Broadcom, a Singapore-based company said to have deep ties to China, the government in Beijing could retaliate by hindering Bain's purchase.

Toshiba will likely abandon the sale altogether should these difficulties appear insurmountable. The deal was originally viewed as necessary to avoid ending a second straight fiscal year with negative shareholders' equity, which would have triggered automatic delisting from the Tokyo Stock Exchange. A 600 billion yen share sale last December obviated that need, so Toshiba can walk away from the memory sale unscathed as long as Bain agrees.

Some shareholders have even begun questioning the reasoning behind the sale, since memory operations account for 90% of Toshiba's annual operating profit. But if the deal collapses, the company will need another source for the hundreds of billions of yen in annual investment required to continue developing the memory business amid intensifying competition with such players as Samsung Electronics. With Toshiba's capital ratio at a fragile 11% at the end of March, "we cannot handle any more big investments," a senior official said.

Listing Toshiba Memory is one solution. An initial public offering would broaden its access to investment capital while reducing Toshiba's ownership and liability. But preparing a stock market debut would take time. "The earliest we could list would be 2019," a Toshiba official said. In the meantime, Toshiba would need bridge financing to keep investments in the unit on track -- a hard sell for creditor banks and activist investors seeking a quick win.

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