Confusion reigns over sale of Toshiba's memory ops
Western Digital a wild card after second round of bidding
TOKYO -- Four suitors have come forward for Toshiba's cash-cow memory chip unit. But with aggrieved business partner Western Digital raising objections, the company likely will face many twists and turns before completing the deal that is so crucial to its survival.
Toshiba will soon begin further discussions with potential buyers of Toshiba Memory that made offers in the second round of bidding ended Friday. Separately, Western Digital executives including CEO Steve Milligan are expected to visit Japan as early as next week for discussions.
Western Digital-Toshiba ventures running the memory unit's key Yokkaichi factory in Japan would be sold as part of the deal, as Toshiba Memory holds a 50.1% stake. But selling to a third party "is explicitly prohibited" under the joint-venture agreements, Milligan has said. The American chipmaker filed a request for arbitration this week with the International Chamber of Commerce's International Court of Arbitration to block the sale.
The side-channel talks aim to resolve this dispute and let Toshiba move forward with sale talks, perhaps by letting Western Digital take a nonvoting stake in the unit. This is a concession to the dire circumstances the Japanese company faces: Having the chipmaker acquire the unit outright would require screening by antitrust authorities, causing the sale to drag on past Toshiba's March 2018 deadline.
Western Digital is expected to offer 1 trillion yen and some for the operations, falling hundreds of billions of yen short of the 2 trillion yen ($17.9 billion) Toshiba would like. The chipmaker looks to increase its offer by talking to such partners as investment funds.
Meanwhile, Bain Capital of the U.S. has teamed up with the unit's management to present a buyout plan through the formal bidding process. The private-equity fund would take at least a 51% stake in Toshiba Memory, while parties including the unit's management team and Toshiba itself would hold the rest.
This plan aims to publicly list Toshiba Memory two years after the acquisition, preserving the unit's independence and keeping current executives in place. South Korean memory chip manufacturer SK Hynix would help fund the purchase but not be directly involved to avoid running afoul of antitrust law.
Broadcom of the U.S. is also in the running, offering around 2 trillion yen and sizable synergies between Toshiba Memory's operations and its own businesses in chips for communications devices and data centers. This high price will likely appeal to Toshiba and creditor banks, which want to see a sizable offer that covers hefty losses elsewhere at the Japanese conglomerate.
More to come
Taiwan's Hon Hai Precision Industry, or Foxconn, and American investment fund Kohlberg Kravis Roberts are also thought to have tendered a bid. The Innovation Network Corp. of Japan, a public-private tech investment fund, has told Toshiba that it is interested in the unit. The Development Bank of Japan is also expected to join the pack at a later date. These state-backed entities will most likely team up with an existing bidder.
The Japanese government frowns on Foxconn's involvement, fearing potential technology leaks, and Toshiba has questioned whether the contract manufacturer's plan is realistic. But Toshiba shareholders and others could call on the government to explain its rationale, given the offer's sizable price tag rumored to be as high as 3 trillion yen.
Despite the formal close of second-round bidding, Toshiba "is still awaiting offers," an executive said. The conglomerate could also call for a third round of bids in June as second-round bidders bring new players onto their teams.
Toshiba will screen the memory unit's suitors carefully, taking into account such factors as plans to maintain employment and hold onto the Yokkaichi plant, in addition to the offered price. This may help ease bidders' concerns about working with Western Digital. "Even if we're able to buy [Toshiba Memory], the question is whether we'll be able to stay in a partnership with such an uncompromising company," a source at one contender said.
Selling off the memory unit in a timely manner remains essential to Toshiba's turnaround plans. But getting all of the necessary players on the same page will be no mean feat.
Creditor banks of Toshiba are on edge as the number of moving parts in the sale ticks upward. Major lenders renewed 680 billion yen in loan commitments after the conglomerate told banks in April that it would need up to 1 trillion yen to fund capital investment and repay debts until the sale went through. Toshiba put up shares in the memory unit as collateral. New credit lines worth hundreds of billions of yen were also being considered.
But the Western Digital dust-up could cloud the prospect of completing the sale and refilling Toshiba's coffers by fiscal year-end, undercutting banks' reasons for continuing to lend. While creditors have not withdrawn support yet, "this is not the time to extend [Toshiba's] credit line," a bank source said.
Western Digital also has objected to the use of Toshiba Memory shares to back loans. This prevents Toshiba from drawing on its 680 billion yen in credit, though some banks are arranging steps to resolve the matter.
Creditor banks have also noted that a robust memory chip market is feeding the conglomerate's cash reserves, and more than a few have said Toshiba will be fine without fresh financing. But wrapping up the Toshiba Memory sale as soon as possible is still likely the best bet for the company and creditors alike.