Toshiba picks Bain-Japan group as preferred chip unit buyers

Bloomberg

Toshiba Corp. picked a group led by Bain Capital and Japanese investors as the preferred bidders for its memory chip business, bringing much needed cash into the Japanese company to make up for losses in its nuclear operations.
The parties are aiming to reach final agreement by June 28 and close the transaction by March, Toshiba said in a statement on Wednesday. The consortium has indicated that it’s willing to pay 2.1 trillion yen ($19 billion) for the semiconductor unit, people with knowledge of the matter have said.
Backing for the bid by state-supported Innovation Network Corp. of Japan and Development Bank of Japan are considered essential for winning government approval for an acquisition. Economy, Trade and Industry Minister Hiroshige Seko said he welcomes Toshiba’s decision on the bid, following the announcement.
Although the chip unit is Toshiba’s crown jewel, the Tokyo-based company will be left with more than 600 different businesses, including elevators, a general hospital and software services. Toshiba’s Westinghouse Electric nuclear division has filed for bankruptcy after losses piled up from project delays, forcing Toshiba to predict an annual loss of 1.01 trillion yen. All of this is a humiliating predicament for one of Japan’s oldest businesses, which made the country’s first light bulb and grew into a behemoth that made everything from washing machines and medical equipment to laptops and nuclear plants.
“Toshiba has determined that the consortium has presented the best proposal, not only in terms of valuation, but also in respect to certainty of closing, retention of employees and maintenance of sensitive technology in Japan,” the company said in the statement.
Toshiba shares fell 1.3 percent as of 12:57 p.m. in Tokyo. Toshiba is up about 15 percent this year. While Bain, INCJ and DBJ will contribute cash and equity, South Korean chipmaker SK Hynix Inc. will join the group by providing only loans to avoid antitrust hurdles, another person familiar with the matter has said. Toshiba didn’t mention SK Hynix in Wednesday’s statement. INCJ confirmed Toshiba’s decision in an emailed statement and said it’s working with the consortium to finalize the details of the deal.
The other leading contender was US chipmaker Broadcom Ltd., which made an offer of about 2.2 trillion yen, according to people with knowledge of the matter.
The closing of the deal may be complicated by objections from Western Digital Corp., which jointly owns certain chip assets with Toshiba. The US company has sought to prevent the business falling into the hands of rivals and opposed Broadcom in particular. On Wednesday, Western Digital reiterated that Toshiba is violating its rights and that it will press forward in seeking an injunction against a sale of the chip unit.
“We still have the Western Digital lawsuit, so it’s not as if this will make everything alright,” said Naoki Fujiwara, chief fund manager of Shinkin Asset Management Co. in Tokyo.
For potential chipmaker buyers, control of Toshiba’s output of memory chips is crucial in making any investment worthwhile. And investment firms need to guarantee they have enough capital available to continue to upgrade Toshiba’s plants and production in an industry where billions of dollars a year are needed to stay competitive.
The sale of the chip business helps reduce the risk of delising for Toshiba, but the company has yet to get a clean bill of health from the Tokyo Stock Exchange. The company in March submitted a report to authorities detailing how it plans to improve internal controls after years of misstating profit. It then delayed earnings announcements multiple times, eventually filing results without a sign-off from its auditors. Proxy adviser Glass Lewis & Co. blasted Toshiba’s board for poor governance and recommended investors vote against all directors at the company’s shareholders meeting later this month.
“Delisting triggered by excess debt is no longer a risk, but Toshiba hasn’t yet cleared the issues related to earnings results,” Hideki Yasuda, an analyst at Ace Research Institute. “That will be the focus of attention going forward.”