9-21-17 5:15 AM EDT | Email Article

In sale of its chip unit, Japanese company picks group that also includes Apple, Seagate

By Takashi Mochizuki, Peter Landers and Dana Cimilluca 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (September 21, 2017).

TOKYO -- Toshiba Corp.'s board on Wednesday voted to sell its memory-chip business to a group that includes Apple Inc. and Dell Technologies Inc. for Yen2 trillion ($18 billion), moving the deal closer to final agreement despite objections from a Toshiba business partner.

The troubled Japanese industrial conglomerate said it hoped to conclude a final contract soon with the bidder group, which is led by U.S. private-equity firm Bain Capital. Toshiba outlined a plan to keep a role in the chip unit even after the sale, reflecting its desire to stay involved in a business that has been growing quickly thanks to demand for the chips in smartphones, computer servers and other electronics.

Toshiba said it chose the Bain group over two rival groups, one that includes Western Digital Corp. and the other represented by Taiwan's Foxconn Technology Group. The decision comes a week after Toshiba and the Bain group signed a nonbinding document saying they intended to reach a deal by Sept. 30.

At least two hurdles remain to a deal: antitrust review by authorities around the globe, and objections from Western Digital, Toshiba's partner in the chip business. Western Digital says it has the right to veto any sale, while Toshiba says no such right exists. The two parties are headed for international arbitration.

Toshiba said that under its interpretation, it could carry through with the sale of the chip unit even if Western Digital wins a favorable ruling in arbitration. Western Digital said it was "disappointed" by Toshiba's decision and confident that it would prevail in arbitration.

While Toshiba's statement Wednesday didn't mention Apple and Dell, Bain has said its consortium includes those two companies as well as Kingston Technology Corp. and Seagate Technology PLC. Apple plans to offer a loan guarantee of some $3 billion to support the Bain group, a person familiar with the matter said. The person cautioned that final terms have yet to be set.

Meanwhile, Seagate, which helped assemble the Bain consortium, will contribute as much as $1.25 billion in the form of nonconvertible preferred securities, the person said. The disk-drive maker is expected to sign a long-term supply agreement with an independent Toshiba chip business.

By joining the deal, big customers for Toshiba's chips such as Apple may find it easier to secure supply in a market with high demand. They would also prop up a rival to the memory-chip leader, Samsung Electronics Co., which competes with Apple in smartphones.

Under the procedure outlined by Toshiba on Wednesday, it would sell the chip unit for about $18 billion to a special purpose company set up by Bain. Once the deal closes, Toshiba would invest Yen350.5 billion ($3.2 billion) in that company. A Toshiba spokesman said if those steps happened as planned, Toshiba would hold a stake of between 20% and 50% in the chip unit.

The sale process, which began in January, has gone through many twists and turns as a divided Toshiba board considered the offers, bidders revised their terms and the Japanese government weighed in. Japanese officials expressed caution about the bid by Foxconn, formally known as Hon Hai Precision Industry Co., because of its extensive operations in China.

Toshiba needs the money because of huge losses from its U.S. nuclear subsidiary, Westinghouse Electric Co., which filed for bankruptcy protection in March. As of June 30, Toshiba's liabilities exceeded assets by about $4.5 billion.

If the deal with the Bain group goes through, Toshiba said it expected to earn after-tax profit of nearly $7 billion, which it said would put its balance sheet back in the black by next March 31. That would clear the way for its shares to remain listed on the Tokyo Stock Exchange.

But the schedule is tight, even if Toshiba reaches a definitive agreement soon with the Bain group. Toshiba's chip business has the second-largest market share by revenue after Samsung, according to research firm IHS Markit, and a sale of such a big business is normally reviewed intensively by antitrust authorities of various nations. The process often takes more than six months.

Toshiba said the Bain group envisioned transferring a limited number shares in the chip unit to a "foreign company," which it didn't name. A person familiar with the matter said the foreign company was South Korean chip maker SK Hynix Inc. The extent of SK Hynix's future involvement in the Toshiba chip unit is likely to be scrutinized by antitrust authorities.

The Bain group was initially led by the Innovation Network Corp. of Japan, a fund backed by the Japanese government, and included the government-owned Development Bank of Japan, but they later scaled back their involvement. Toshiba said Wednesday the two government-affiliated entities could eventually take a stake in the chip unit and, ahead of that, would be granted certain rights to influence key decisions at the unit.

Write to Takashi Mochizuki at takashi.mochizuki@wsj.com, Peter Landers at peter.landers@wsj.com and Dana Cimilluca at dana.cimilluca@wsj.com

 

(END) Dow Jones Newswires

September 21, 2017 05:15 ET (09:15 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.
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