A $20 Billion Bid for a Japanese Icon Could Just Work

(Bloomberg Opinion) -- A possible $20 billion-plus buyout bid for Toshiba Corp. looks at first glance like another example of private equity over-reaching itself in the scramble to spend its abundant capital. Everyone knows that bids for Japanese corporate icons are hard, especially when the buyer is foreign. But common wisdom isn’t always right, and CVC Capital Partners has timed its approach for the industrial conglomerate cleverly.

One question is whether a deal would be just too big. That looks unlikely. The buyout industry has staged deals of a comparable size in recent history — think of the $19 billion deal for ThyssenKrupp AG’s elevator division just before the pandemic was declared last year. CVC’s fifth Asia-Pacific fund, the likely sponsor of this transaction, raised $4.5 billion in 2020. Assume concentration limits restrict 15-20% of this to any one investment and a deal would need consortium partners to write the equity check. But private equity is used to club deals. All told, this is doable.

That leaves the question of whether Toshiba is too sensitive an asset to be acquired. This is harder to gauge. An outright block is, however, far from a foregone conclusion. A Japanese consortium partner might help assuage security concerns about foreign ownership of Toshiba’s technology.

Might public pressure resist the takeover of a household name? Toshiba’s recent past, including an accounting scandal, render it an unsympathetic figure. Activist investors recently scored a victory in securing an independent inquiry into voting practices at last year’s annual meeting. It looks awkward that under-fire Chief Executive Nobuaki Kurumatani is a former CVC exec. But negotiating a high price from his former employer would do his shareholders a favor.

Against that backdrop, a well-crafted, joint bid backed by domestic and foreign investors might actually be cautiously welcomed. It’s also unclear what a forthcoming shake-up of Tokyo’s listing regime, bringing tougher corporate governance standards, could mean for Toshiba. All told, a take-private at this time would make several difficult issues go away.

For a transaction to work, there still needs to be enough value creation. According to Nikkei, CVC is mulling an offer worth more than $20 billion. That would be a 26% premium to Tuesday’s closing market value. That’s well above where the shares have traded these last five years. It could stack up for CVC. Toshiba has negligible net debt, so the all-in cost of a deal wouldn’t be much higher. Analysts at UBS Group AG have a price target for the shares of 5,100 yen ($46.43), valuing the firm around $21 billion, based on the standalone strategy and its stake in computer memory business Kioxia Holdings Corp.

Structurally, Toshiba looks like a combination of corporate carve-outs all rolled into one package, offering multiple opportunities for a buyout consortium to extract value over time by optimizing individual assets and parceling them out to new owners.

Of course, CVC may just be attempting a bid for the whole of Toshiba in the hope of getting a deal for just one of the constituent pieces. That might seem more realistic. But if there’s a moment when a foreign bidder could successfully acquire a totemic Japanese company — even with a local partner — this could be it.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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