Toshiba under pressure to
consider 'Plan B' as chip sale falters: sources
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[July 07, 2017]
By Makiko Yamazaki and Taro Fuse
TOKYO (Reuters) - As the $18 billion sale
of Toshiba Corp's memory chip unit to a government-approved consortium
falters, some bankers and potential investors are pressing the board to
seriously consider alternatives, people with direct knowledge of the
sale process said - including picking a new buyer.
Those people say Toshiba's leadership is sticking to Plan A: selling the
world's second-largest memory chip maker to a Japanese government-backed
group that also includes Bain Capital.
But the clock is ticking for Toshiba, which was still recovering from a
$1.3 billion accounting scandal in 2015 when it was hit by billions of
dollars of cost overruns at its U.S. nuclear unit Westinghouse in
December.
Unless it closes a deal by March, a gaping balance-sheet hole will
prompt automatic delisting of its shares from Tokyo's stock market -
further battering its shareholders.
As questions emerge around the role of South Korean rival SK Hynix in
the preferred bidder group, some Toshiba executives and officials at the
company's main creditor banks say they want top management to look at
other options.
"Toshiba hastily picked the consortium ahead of its [June 28] annual
shareholders meeting, but more and more flaws are emerging as time
passes," said a senior official at one of Toshiba's banks.
SK Hynix, which was initially included just to help fund the deal, is
now looking to own equity in Toshiba's chips unit, according to sources,
raising antitrust and national concerns in Japan. SK Hynix has not
commented.
Addressing concerns that its chip technology could be handed to a
foreign rival, Toshiba said previously that SK Hynix would have no
equity or management influence.
Scrapping that deal would leave one obvious option: rival suitor Western
Digital, which bid for the chip business with private equity firm KKR.
But Western Digital, already a Toshiba joint venture partner, is in a
legal dispute with the Japanese firm, and sources describe a deep
distrust.
But Western Digital could have the support of government-backed
Development Bank of Japan (DBJ) and Innovation Network Corp of Japan (INCJ)
- both currently part of the preferred buyer consortium - the sources
said. They are said to be wary of SK Hynix, and of Toshiba agreeing a
sale to the group while Western Digital has sought an injunction to stop
it.
"If asked, we are ready to team up with Western Digital and KKR, and we
actually prefer that," said a senior official at one of the government
investors.
Both the DBJ and INCJ declined to comment.
A Toshiba spokesman said the firm is negotiating with the preferred
buyer consortium to sign a definitive agreement as soon as possible.
Selling other assets seems a less likely avenue, as Toshiba has few of
sufficient value, and a piecemeal process could take too long.
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A logo of Toshiba Corp is seen on a printed circuit board in this
photo illustration taken in Tokyo July 31, 2012. REUTERS/Yuriko
Nakao/File Photo
It sold its medical equipment business to Canon Inc for $6 billion last year.
There are plans to list Toshiba's smart meter business Landis+Gyr, but that will
not plug the gap. Toshiba turned down offers from buyout group CVC and
industrial conglomerate Hitachi to buy the business for almost $2 billion
earlier this year, sources have said.
Toshiba cannot raise cash by issuing shares because of restrictions imposed by
the bourse after the 2015 scandal.
DEAL OR NO DEAL
Toshiba has been scrambling for cash for months - since it shocked investors
late last year with news of the cost overruns and delays at Westinghouse, which
forced a hefty writedown and losses.
Westinghouse filed for bankruptcy in March in one of the nuclear industry's most
costly collapses to date, leaving Toshiba to cover $6 billion of liabilities it
guaranteed.
Even so, investors and some creditors say they fear Toshiba may simply refuse to
consider what appears to be the most obvious option.
"Some within Toshiba say they'd rather die than be (acquired by) Western
Digital," said a banking official who has discussed the deal with senior Toshiba
executives.
Western Digital is a recent partner for Toshiba - it bought SanDisk, Toshiba's
memory chip business partner for 17 years, in May last year. A leap from joint
venture partner to buyer would have to overcome significant distrust.
Last month, Western Digital sought a U.S. court injunction to prevent a sale of
Toshiba's chips arm without its consent.
"We worked with SanDisk over more than 10 years, but it's been just one year
that we've worked with Western Digital executives, and we've had no good
experience from it," a senior Toshiba executive said.
Two people familiar with the matter said Toshiba believes that even if the court
grants the injunction, it can proceed with a chip sale agreement - so long as it
holds off completion.
U.S. chipmaker Broadcom Ltd, previously considered a major candidate with a $20
billion offer for the Toshiba chips arm, backed off due to legal risks involving
Western Digital.
($1 = 113.5600 yen)
(Reporting by Makiko Yamazaki and Taro Fuse; Additional reporting by Taiga
Uranaka and Kentaro Hamada in TOKYO; Editing by Clara Ferreira Marques and Ian
Geoghegan)
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