TOKYO – When business leaders in Japan lately aren’t talking about the new American president, they dwell anxiously about the implosion going on at Toshiba.
Toshiba faces massive writedowns – projected as high as $6 billion — from its nuclear business. The big black cloud hanging over Toshiba’s future in Japan is that neither the financial market nor Toshiba has firm grip on the size of the writedowns.
Last week, Toshiba confirmed that it’s looking to spin off its core semiconductor business. Toshiba’s chip division includes its lucrative NAND memory business, which generated 15% of the group’s 5.7 trillion yen annual revenue (about $50 billion), and has an estimated value of about 1.5 trillion yen (about $13 billion).
Since last Thursday, the Japanese media has been leaking names of potential buyers.
The first to surface was Western Digital Corp. Western Digital already operates a Japanese NAND flash memory plant with Toshiba in Yokkaichi, Mie prefecture. Similarly, Canon, which bought last year Toshiba’s medical devices unit for $6 billion, is believed to have begun weighing in on possible support for Toshiba.
Judging from previous interventions by the Development Bank of Japan (DBJ) to help restructure troubled Japanese technology companies, the prospect of state help is a logical option.
Toshiba held a meeting with the DBJ on January 19th, evidently hoping that an injection of state-backed capital might prompt Japanese regional banks to extend loans. It remains to be seen, however, if the DBJ is willing to help Toshiba plug a hole that’s bigger than anybody anticipated.
Meanwhile, Nikkei, the Japanese economic journal, reported Sunday at least four private funds are looking into Toshiba’s semiconductor business under non-disclosure agreements. They include Silver Lake and KKR. Separately, Nikkei cited China’s state-controlled Tsinghua Unigroup as a fund eager to invest in Toshiba’s NAND business. Tsinghua Unigroup announced plans to build a $30 billion memory chip in Nanjing just last week.
All in all, at least 10 suitors are believed to be interested in Toshiba’s NAND flash business, the company’s crown jewel. Selling a stake in the spun-off chip business appears to be the quickest way for the Japanese company to boost its capital. Yet, several factors make Toshiba’s plan both more urgent and complex.
First, Toshiba, facing huge writedowns, must forge a deal within a very tight window. Failure to offset the nuclear hit by March — the end of the financial year — could largely wipe out Toshiba’s 363 billion yen of shareholder equity and push it into negative net worth. Toshiba could also lose its place on the Tokyo Stock Exchange’s “first section,” for larger companies.
Although the possibility of a capital infusion from Western Digital appears the most favorable solution, the downside includes a lengthy antitrust review the deal between the two companies might trigger. This process, if it happens, wouldn’t allow Toshiba to meet the March deadline.
To avoid anti-trust concerns, investments by private equity funds might be just what Toshiba needs. However, private equity firms might not find the deal attractive, since Toshiba is offering only a minority stake in its semiconductor spin-off, not the business as a whole. To make the most of this investment, private equity funds would prefer to run the spin-off as efficiently as possible – a goal harder to achieve with a minority stake.
Japanese media reports say that Toshiba could sell 20-30% of its chip business, but it would never give up its majority.
If Toshiba is genuinely interested in restructuring, the option that makes the best business sense is to offload its nuclear operations, rather than its NAND memory business. Japanese industry observers dismiss this choice because of the key role Toshiba is expected to play in the clean-up of the tsunami-ravaged Fukushima Daiichi nuclear plant. Two of the wrecked reactors were built by Toshiba.
Decommissioning of the wrecked reactors is expected to take at least 40 years. The Japanese government needs Toshiba to continue its nuclear business throughout that period.
— Junko Yoshida, Chief International Correspondent, EE Times