LDN - Business

Toshiba ups the ante in chip unit sale with attack on Western Digital

[May 09, 2017] By Makiko Yamazaki

TOKYO (Reuters) - Toshiba Corp has told Western Digital Corp not to interfere in the sale of its prized chip unit, rejecting claims it has breached a joint venture contract and threatening legal action.

The clash between Toshiba and Western Digital - both its business partner and one of the bidders for the chip unit - risks delaying or even quashing an auction that the Japanese conglomerate is depending on to plug a $9 billion hole in its accounts.

Although the two companies jointly operate Toshiba's main semiconductor plant, Western Digital is not seen as a favored bidder for the world's second biggest NAND chip producer, having put in a much lower offer than other suitors, sources with knowledge of the matter, have said.

The U.S. firm has argued the Japanese company is violating their contract by transferring their joint venture's rights to the newly formed unit and has asked for exclusive negotiating rights. Chief Executive Steve Milligan is currently visiting Japan to press its case.

But in a May 3 letter sent by Toshiba's lawyers, the TVs-to-nuclear conglomerate disputed Western Digital' s argument and said it would pursue all available remedies if it saw continued interference in the sale process.

Western Digital's "campaign constitutes intentional interference with Toshiba's prospective economic advantage and current contracts. It is improper, and it must stop," the letter, which was seen by Reuters on Tuesday, said.

In a separate letter, also dated May 3, the general manager of Toshiba's legal affairs accused Western Digital of failing to sign some joint venture agreements.

If Western Digital refuses to sign by May 15, the chip unit would protect its intellectual property rights by suspending Western Digital employees' access to all of the unit's facilities, networks and databases, the letter said.

A Western Digital spokeswoman in Japan declined to make immediate comment.

For some analysts, Western Digital has the upper hand.

"From a commonsense standpoint, it's hard to buy Toshiba's argument that it doesn't need approval from its JV partner because it's almost a 50-50 joint venture," said Masahiko Ishino, an analyst at Tokai Tokyo Research Center.

SEEKING SUITABLE SUITORS

Toshiba believes that a consortium of U.S. private equity firm KKR & Co LP and Japanese government-backed investors would be the most feasible solution, a source familiar with the matter said this week.

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The logo of Toshiba is seen as a shareholder arrives at Toshiba's extraordinary shareholders meeting in Chiba, Japan March 30, 2017. REUTERS/Toru Hanai/File Photo

Such a sale could eventually allow the chip unit - which Toshiba values at at least 2 trillion yen ($17.6 billion)- to aim for an IPO and keep the technology in Japan, the source said.

KKR and state-backed Japan Innovation Network Corp are expected to submit a joint offer in the second round of bidding.

Other suitors are Taiwan-based Foxconn, U.S. chipmaker Broadcom Ltd, which has partnered with private equity firm Silver Lake Partners LP, as well as South Korea's SK Hynix Inc.

But Western Digital has vehemently said it is opposed to a deal with Broadcom. Other suitors could also be blocked by the Japanese government which has vowed to prevent any deal that could allow the transfer of sensitive technologies and represent a risk to national security.

The source also said that Toshiba plans to report full-year results this month without an endorsement from its auditor - its second such earnings report - as disagreements over its books are unlikely to resolved.

The move puts the troubled Japanese conglomerate's bourse listing in further jeopardy, after it submitted twice-delayed third-quarter results without approval from PricewaterhouseCoopers Aarata (PwC) last month.

Toshiba has been on the Tokyo stock exchange's supervision list since mid-March as it has failed to clear up concerns about its internal controls after a 2015 accounting scandal.

PwC has been questioning the numbers at nuclear unit Westinghouse - the root cause of Toshiba's current crisis - and is looking not only recent results, but also probing the books for the U.S. unit for the year through March 2016, sources have said.

($1 = 113.6300 yen)

(Reporting by Makiko Yamazaki; Editing by Edwina Gibbs)

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