Toshiba May Sell Stake in Chip Business to Cover Writedown

January 18, 2017, 2:18 PM UTC

Toshiba wants to sell a minority stake in its core semiconductor business and is considering potential buyers including U.S. partner Western Digital, a source said, as the Japanese group prepares for a multi-billion-dollar writedown.

The laptops-to-engineering conglomerate, still recovering from a $1.3 billion accounting scandal two years ago, shocked investors in December by announcing major cost overruns at a U.S. nuclear business it bought in 2015. That could now mean a charge against profit topping $4 billion.

The exact scale of that number is due to be made final next month, Toshiba said.

Toshiba (TOSBF), still on the Tokyo Stock Exchange watchlist after the 2015 scandal, does not have many options to offset the impact of a writedown of that size, which could wipe out shareholder equity.

Analysts and investors have expected a spin-off and a part-sale of the profitable chips business to be part of any solution, potentially along with other, smaller asset sales.

“It is true that we are discussing a spin-off of our memory chips business, but nothing has been decided,” Toshiba said in a statement on Wednesday, after the Nikkei business daily reported the firm was considering such a move.

The chips unit generates most of the Japanese firm’s operating profit.

While Toshiba did not confirm whether it was looking to sell around 20% in the unit to Western Digital at a price in a range of $1.76 billion to $2.7 billion, as Nikkei reported, a source briefed on the matter said Toshiba and Western Digital were in talks for a “minority stake” sale.

The two companies jointly operate a NAND flash memory plant in the city of Yokkaichi in Mie prefecture.

“Toshiba doesn’t have any other options. I have an impression that this deal is their last-ditch measure,” said Yasuo Sakuma, portfolio manager and executive officer at Bayview Asset Management.

Industry sources told Reuters that Toshiba could also ask funds to invest in the chips business, a unit that sources have said could be valued at more than 1 trillion yen ($8.9 billion). One analyst at a foreign investment group estimated on Wednesday a valuation of 2 trillion for the unit.

“There are several candidates for investment,” one of the sources said, without giving details.

Toshiba is also currently in talks with its creditor banks, who are expecting details on the writedown over the coming days. It is not clear what guarantees the banks have sought.

Growth Engine

The Japanese company is aiming to complete the spin-off by the end of March, the sources said, adding Toshiba could eventually list the unit but would retain a majority stake in a unit that, while cash intensive, is also a key growth engine.

According to researcher IHS, Toshiba had a 20.4% share in the global NAND flash memory market in April-June last year in terms of revenue, ranking second after Samsung Electronics which had a 34.9% share.

The combination of Toshiba and California-based data storage company Western Digital would create a new industry leader.

Western Digital did not immediately respond to requests for comment on a deal.

Toshiba shares closed up 2.4%, versus a 0.4% gain in the benchmark Nikkei average.

The company reported an operating profit of 78.3 billion yen from its chips and devices business over April-September 2016, accounting for 81% of its total operating profit.

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