Toshiba May Miss Deadline for Chip Sale -- And Reap Billions
Toshiba Corp. memory chips are seen on memory modules in an arranged photograph in Tokyo, Japan (Photographer: Kiyoshi Ota/Bloomberg)  

Toshiba May Miss Deadline for Chip Sale -- And Reap Billions

(Bloomberg) -- It’s increasingly likely Toshiba Corp. will miss a March deadline for closing the sale of its memory chip business. That could turn out to be $4 billion worth of good news for the Japanese conglomerate.

The company agreed to sell the crown-jewel memory unit to a consortium led by Bain Capital to avoid delisting after billions of dollars of losses in its nuclear energy operations. But China has yet to grant approval for the deal and regulators are unlikely to sign off before the contract’s March 31 deadline, according to people familiar with the matter. That could give Toshiba, now on more stable footing, the opportunity to negotiate a better deal than the 2 trillion yen ($18.6 billion) sale price from September, which may undervalue the business by several billion dollars.

China has a vested interest in the semiconductor industry because it’s the world’s largest market for chips and it’s trying to foster domestic rivals to established players in the U.S. and South Korea. Officials at the Ministry of Commerce are concerned South Korea’s SK Hynix Inc. may end up with a significant stake in Toshiba’s chip business, consolidating power among the top players. The ministry could also impose conditions that would materially impact the value of the business, such as requiring Toshiba to freeze prices or separate its solid state disk and chip memory operations, the people said, asking not to be named because the details are private.

“China will not be held to any timeline that happens to be convenient to Toshiba,” said Damian Thong, a Tokyo-based technology analyst at Macquarie Group Ltd. “It seems extremely unlikely that they will meet the deadline.”

Toshiba spokeswoman Midori Hara said the company is working to meet the March 31 deadline. Bain declined to comment.

If the deal doesn’t close by March 31, Toshiba has the right to terminate. While the company was desperate to raise cash last year, it no longer needs the money to avoid delisting and executives now believe the Bain deal is priced well below market. Toshiba is likely to face questions about the issue Wednesday as it reports financial results.

The current terms of the sale are the result of eight months of wild negotiations. Two bidders, Hon Hai Precision Industry Co. and Broadcom Ltd., offered 2.5 trillion yen or more before bowing out in the face of political resistance. In the end, Bain claimed the prize by fending off a legal challenge from Toshiba manufacturing partner Western Digital Corp. and winning support from Apple Inc., arguably Toshiba’s most important customer. The chip unit would probably fetch $22 billion to $24 billion in a truly open auction, said another person familiar with the matter.

Toshiba is on much more stable footing since the deal was negotiated. It is boosting capital with a 410 billion yen nuclear asset sale and a 600 billion yen new share issuance in December. At the same time, the memory chip business has become even more valuable: It generated 205 billion yen in operating income in the fiscal first half, about 88 percent of the total.

“They really don’t have as many reasons to sell the business any more, except that the contract is already signed,” said Hideki Yasuda, an analyst at Ace Research Institute. “From shareholder perspective, keeping the chip business inside the group is the best possible scenario.”

Toshiba would have at least three options if the current deal falls apart. It could negotiate a higher price with the Bain group. It could take the memory chip business public, raising capital and increasing its visibility. Or it could hold onto the business and use its steady profits to fund investments.

Making any changes would require navigating a broad group of stakeholders. Sumitomo Mitsui Banking Corp. and Mizuho Financial Group Inc., Toshiba’s main lenders, will play a key role in any decision and won’t easily change their support for the current terms of the deal, the people familiar said. The banks also pledged 600 billion yen in loans to the resulting entity provided the sale gets China’s approval. While renegotiating the terms or listing the unit could result in a greater return, the banks’ primary interest is in reduced downside risk, Macquarie’s Thong said.

Proponents of renegotiating the deal may get a boost from an influx of new Toshiba shareholders who could take a more active role in the electronics maker’s affairs. The issuance of new shares in December gave a total of about 60 funds, including David Einhorn’s Greenlight Capital, Daniel Loeb’s Third Point and Effissimo Capital Management Pte, about a third of the company.

Toshiba could gain an additional 200 billion yen by renegotiating, said one of the investors that took part in the December equity financing. Investors plan to use Toshiba’s general shareholders meeting scheduled for late June to agitate for a better deal, the person said, asking not to be named because the opinions are not public.

“Their input is limited, since these are not the power brokers,” Thong said. “But a few vocal shareholders could, for example, strengthen the hand of an internal faction that is opposed to the sale.”

©2018 Bloomberg L.P.

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