Western Digital Moves to Block Toshiba Deal in Arbitration

(Bloomberg) -- Western Digital Corp. is taking legal action to try to guarantee a say in who gets to buy the chip unit of Toshiba Corp., its partner in a manufacturing joint venture.

The U.S. company invoked an arbitration clause in their business agreement, which could postpone a sale Toshiba needs to complete quickly. In preparation for the divestment, the Japanese technology company transferred ownership of the unit to a separate legal entity but didn’t get permission before doing so, according to Western Digital. The two should enter binding arbitration to resolve the dispute, Western Digital said.

In response, Toshiba said it hasn’t received any notice of arbitration, and rejected claims that the process is in breach of the joint venture agreement.

The companies are increasingly at odds as Toshiba tries to raise cash needed to keep itself afloat following a disastrous investment in nuclear power. The joint venture may find itself at risk if Toshiba’s chipmaking operation is snapped up by a Western Digital competitor. Western Digital executives have described Toshiba’s situation as “desperate.”

“We firmly believe that we provide Toshiba with the optimal solution to address its challenges and that we are the best partner to advance its legacy of technology innovation in Japan,” Western Digital Chief Executive Officer Steve Milligan said in a statement. “Toshiba’s attempt to spin out its joint venture interests into an affiliate and then sell that affiliate is explicitly prohibited without SanDisk’s consent.”

Tokyo-based Toshiba said in an emailed statement that it will continue to handle the sale properly, and that Western Digital has “no grounds” to interfere with the process.

“The possibility of this dispute delaying the chip unit sale is bad news for Toshiba’s shares,” said Hideki Yasuda, an analyst at Ace Research Institute. “Toshiba’s memory business is very appealing and has attracted a lot of potential buyers. But Western Digital, just coming out of a major acquisition itself, simply can’t afford it and must make the most out of its position as a joint venture partner to get to an outcome more favorable to itself.”

Underscoring the need for Toshiba to secure a sale of the chip business, the company announced preliminary results for the year that ended in March showing a net loss of 950 billion yen ($8.4 billion yen). Shareholder equity was negative 540 billion yen for the year, and will be another 540 billion yen again in the current fiscal year unless a divestment happens, the company said. Toshiba is selling assets to contend with writedowns in its Westinghouse nuclear business, stemming from excessive costs and construction delays. The Japanese company put its Westinghouse Electric nuclear unit into Chapter 11 bankruptcy protection.

Separately, utility owner Southern Co. has agreed to take the lead from Toshiba’s bankrupt U.S. nuclear power unit on building two reactors at its plant in Georgia as soon as next month. Toshiba’s stock rose as much as 5.7 percent in Tokyo on Monday.

Toshiba previously told Western Digital not to interfere in the sale plans and that it may take legal action. It also said the U.S. company failed to formalize their relationship after Western Digital became its-flash memory manufacturing partner after the acquisition of SanDisk Corp. last year. Toshiba said the two companies must come to an agreement by May 15 or it would bar Western Digital employees from its facilities and networks.

Arbitration will take place in San Francisco, Western Digital said. Each side will propose one member of the three-person panel. The third, who will serve as chairman, will be chosen by either the two other members or the International Chamber of Commerce, which will oversee the arbitration. The process can take as long as a year. Any move that undermines arbitration, such as a sale of the unit before the panel reaches a decision, could allow the issue to go to court.

The type of chip produced by the joint venture, known as flash memory, is enjoying a bumper year. Micron Technology Inc., Samsung Electronics Co. and SK Hynix Inc. have all reported strong demand for the product as the industry moves away from magnetic disks in computer storage. Toshiba’s sale has garnered significant interest, with preliminary bids as high as $26 billion from Hon Hai Precision Industry Co., Bloomberg reported last month. Other bidders include SK Hynix and Broadcom Ltd.

Mark Long, chief financial officer of Western Digital, said this month that “each of the rumored bidders is problematic.” The company has talked to all of the prospective buyers to look for a solution.

Western Digital has held discussions with Innovation Network Corp. of Japan and Development Bank of Japan Inc. about options for making a bid of its own. It hopes to secure exclusivity with Toshiba and has argued that a sale to a third party is in breach of their joint-venture agreement -- a claim that the Japanese side disputes.

To contact the reporters on this story: Ian King in San Francisco at ianking@bloomberg.net, Pavel Alpeyev in Tokyo at palpeyev@bloomberg.net, Takako Taniguchi in Tokyo at ttaniguchi4@bloomberg.net.

To contact the editors responsible for this story: Jillian Ward at jward56@bloomberg.net, Robert Fenner at rfenner@bloomberg.net, Reed Stevenson