Toshiba Fails to Conclude Chip Unit Negotiations

Christian Cutler August 31, 2017
Toshiba Fails to Conclude Chip Unit Negotiations

Toshiba Corp misses its self-imposed deadline on Thursday on the sale of its chip unit business, increasing chances of its delisting in Tokyo Stock Exchange.

The Japanese conglomerate has been frantically eager to seal a deal in the sales of its chips business, in order to cover its massive losses from its bankrupt US nuclear plant Westinghouse, and it has also been negotiating with three different bidders. In a statement, Toshiba named its suitors composed of a consortium led by Western Digital Corp, a consortium led by Hon Hai Precision Industry Co (also known as Foxconn), and a consortium led by Bain Capital.

In June, the consortium led by Bain Capital was marked as the company’s preferred bidder, until Western Digital Corp, which is its business partner, interfered with the negotiation and argued that Toshiba needs the American company’s permission before doing any sale.

Bain Capital previously submitted 2.1 trillion yen as its offer, backed by INCJ and the Development Bank of Japan.

Recently, Apple Inc has also jumped in the battle by joining Bain Capital’s consortium. Apple needs Toshiba’s flash memory in its iPhones and iPads, and wants to lock in a long term continued supply deal with Toshiba so that the California-based iPhone maker will not be dependent on Samsung Electronics Co, which is also its rival.

Michael Walkley, an analyst with Canaccord Genuity, stated that the iPhone maker is “always looking to work closely with key suppliers and lock in long-term supply agreements.”

No elaboration has been given about the method that Apple will use to back Bain Capital, although reports suggest that Apple may provide monetary support by pre-paying for chip supplies in the future (a process that Apple has already used in the past). Doing so may be easier for Apple, and may help it avoid denting its relationships with other suppliers.

Japan’s Ministry of Economy, Trade, and Industry (METI) is quite vocal in its support for Western Digital’s consortium, primarily in order to end the litigation and to quickly reach an agreement. However, top executives in Toshiba are not easily convinced, as they argue that a deal with Western Digital will not sufficiently protect the interests of its chip units.

The Western Digital consortium offers about 2 trillion yen, and it would loan money for the initial purchase with rights to take minority stake equity eventually.

As for Foxconn, Terry Gou, its founder, indicated that they are willing to pay as much as 3 trillion yen.

Initial deadline target was on August 31, but according to a statement released late on Wednesday, Toshiba is still in an on-going negotiation with the three bidders, and it has not yet made any reduction in the pool of candidates.

“Toshiba intends to continue negotiations with possible bidders to reach a definitive agreement which meets Toshiba’s objectives at the earliest possible date,” Toshiba said in the statement.

Failure to close a deal quickly may make Toshiba miss the necessary regulatory approvals by the end of the financial year in March. As a consequence, its net worth will be marked negative for the second year running, and the company might get delisted in the Tokyo Stock Exchange.

“They need to come to an agreement in September to get all of the anti-trust approvals in place,” said Hideki Yasuda, an analyst at Ace Research Institute. On the other hand, Yasuda added that Toshiba could still keep its business, but it has to endure being delisted.

Meanwhile, whoever wins the bidding is expected to pay enough cash to repair Toshiba’s balance sheet, as well as to finance capital investments in the chip business after the purchase, according to Toshiba. The winner is also expected to be capable of quick and flexible decision making, the Japanese company added.

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Christian Cutler


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