The World Is Watching How Toshiba Handles This Bid

(Bloomberg Opinion) -- Toshiba Corp. has a chance to prove that corporate Japan really can look out for shareholders. Will the iconic conglomerate take it?

The sprawling industrial company this week parted with its chief executive officer after his former private equity employer, CVC Capital Partners, made a tentative $21 billion takeover approach. Nobuaki Kurumatani’s resignation removes a potential conflict of interest in any bid talks. This governance upgrade won’t benefit investors unless the board is open to exploring a sale of the company at the right price.

Kurumatani was previously president of the European buyout firm’s Asia-Pacific business and could have been a beneficiary of a take-private transaction, assuming he retained his leadership role. A deal would also have taken the sting out of activist attacks on Toshiba’s leadership over its handling of voting at last year’s annual meeting.

These possible conflicts could have been managed with Kurumatani in situ, by establishing an independent committee to evaluate approaches, as some shareholders have requested. And his exit came amid internal resistance to the CVC approach, Bloomberg News reported. Toshiba has said CVC's proposal is conditional, with complex financing that would take time to arrange.

The question now is whether the board is willing seriously to consider a deliverable deal at a better price than the 5,000 yen ($45.90) per share that CVC was said to be dangling — or whether it’s stubbornly wedded to independence.

Any company facing a bid from private equity should ask if its shares could just as easily hit the offer price without a deal, given financial buyers usually bring no industrial synergies to the table. Toshiba’s stock has long been weighed down by a conglomerate discount. Removing this could create considerable gains for shareholders while staying a public company.

Analysts at Jefferies Financial Group Inc. see a path to Toshiba shares touching 5,380 yen under their own steam in the foreseeable future. How? First, Toshiba would sell half of its 40% stake in memory-chip unit Kioxia Holdings Corp. at a 1.5 trillion yen valuation for the whole. Then it would buy back its own stock, reducing the share count and boosting earnings per share.

With those things done, and investors warming to Toshiba’s potential, Jefferies says the core business (excluding the remaining Kioxia stake) could be worth 12 times expected 2023 net profit (around 159 billion yen), up from around 10 times currently.

On a bullish scenario — a sale of 80% of Kioxia at a 2.5 trillion yen valuation, a bigger buyback, 30%-higher earnings and a 15-times trading multiple — Jefferies calculates the stock could be worth some 10,440 yen.

Against that backdrop, Toshiba is right not to have rolled over to CVC. But achieving these higher numbers requires a punchy valuation in a chip sale, which is not something the board can control. Above all, it implies an accelerated restructuring, one it’s unclear Toshiba could deliver. Such shakeups are usually better achieved as a private company out of the glare of public markets.

The pressure could build quickly for the board to prove the firm’s worth. Toshiba is already attracting rival buyout interest from KKR & Co. and Brookfield Asset Management Inc. Maybe Toshiba can devise a convincing alternative to a takeover. But if it can’t, and a serious offer is now tabled, shareholders will expect it to secure whatever deal best captures the value a period in private ownership could create.

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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