Now Western Digital Wants to Stop the Sale of Toshiba’s Chip Business

Jun 15, 2017

Western Digital has sought a court injunction to prevent Toshiba from selling its chip business without the U.S. firm's consent—a move that threatens to throw the fiercely contested auction into disarray.

The escalation in the spat between Western Digital, which jointly operates Toshiba's main chip plant, and its business partner follows tense last-minute jockeying by suitors for the world's second-biggest producer of NAND semiconductors.

According to a person familiar with the matter, the California-based firm has been left out of a new Japan government-led group being formed to bid for the unit.

Toshiba's "attempts to circumvent our contractual rights have left us with no choice but to take this action," Western Digital's Chief Executive Steve Milligan said in a statement.

"Left unchecked, Toshiba would pursue a course that clearly violates these rights," he added.

Western Digital has filed its suit with the Superior Court of California, seeking an injunction until its arbitration case against Toshiba is heard. It is concerned about how Toshiba, the Japanese government and other stakeholders are handling the auction process, a second source said.

The second source added it had submitted a revised bid on Wednesday that satisfies Toshiba's requests on deal certainty and price but did not receive a favorable response. Toshiba has demanded at least 2 trillion yen ($18 billion) for the unit.

Sources declined to be identified due to the sensitivity of the negotiations concerning the auction.

Toshiba said in a statement that it was proceeding with selecting a preferred bidder for its memory unit by the second half of June as planned and hoped to reach a definitive agreement on a sale by June 28.

Toshiba wants to complete the deal as quickly as possible to help cover billions of dollars in cost overruns at its now-bankrupt Westinghouse nuclear unit and to dig itself out negative shareholders' equity that could lead to a delisting.

Satoru Oyama, senior principal analyst at research firm IHS, said Western Digital's argument made sense from a common-sense point of view and that developments were moving towards a worst-case scenario for the Japanese company.

"Toshiba has more to lose in the dispute because it is running out of time," he said. "Toshiba and Western Digital eventually have to talk. They cannot afford to keep fighting when Samsung is taking advantage of the NAND market boom and investing massively."

A third source familiar with the matter said Western Digital expects to get a ruling on its injunction request by mid-July and that arbitration cases generally take 16-24 months to resolve.

A state-backed fund, the Innovation Network Corp of Japan (INCJ), has been at the center of trade ministry efforts to forge a successful bid that will keep the highly prized unit under domestic control. But the nature of its partnerships appears to be going through drastic changes compared to just last week.

It has been in talks with Bain Capital and the group now includes South Korea's SK Hynix Inc, sources have said.

INCJ was, however, also part of a proposed bid tabled by Western Digital last week that also included U.S. private equity firm KKR & Co, other sources familiar with the matter have said.

Other bidders include Foxconn, the world's largest contract electronics maker. Foxconn, formally known as Hon Hai Precision Industry, is leading a consortium that includes Apple computing giant Dell and Kingston Technology.

The highest known bid so far is one from U.S. chipmaker Broadcom and its partner, U.S. private equity firm Silver Lake. They have offered 2.2 trillion yen, sources have said.

Toshiba's shares were down 0.5% in afternoon trade.

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