Toshiba Tries to Avoid Delisting by Issuing $5.4 Billion in New Shares

November 20, 2017, 10:48 AM UTC

Toshiba Corp’s (TOSBF) planned $5.4 billion new share issue to overseas investors is set to provide it with most of the funds it needs to avoid a delisting—a quickly arranged deal that underscores both the weakness of its finances and the allure of its chips unit.

Burdened by billions of dollars in liabilities at its bankrupt U.S. nuclear reactor maker Westinghouse, Toshiba has been seeking to make up the difference by the end of the financial year in March or face a delisting. A long and contentious auction for its $18 billion chip unit has meant it cannot rely on those funds coming in on time.

The share issue, decided at a board meeting on Sunday, is equivalent to a 35% stake in the embattled Japanese conglomerate and will see more than 30 overseas investors, including Third Point LLC (TPRE), Oasis Management Company and Cerberus Capital Management, take part.

The deal, engineered by Goldman Sachs (GS), was structured for overseas investors as Toshiba has only recently come off a Tokyo Stock Exchange watchlist it had been on after a 2015 accounting scandal, making it difficult for domestic firms to invest.

For some of the overseas investors, it is an investment that will work out even if the agreed sale of Toshiba Memory, the world’s number two producer of NAND chips, to a consortium led by Bain Capital falls through.

And if the sale manages to survive legal challenges and goes ahead, Toshiba will still own 40% in the semiconductor unit as it plans to reinvest.

“Either after March you have a company with a 40% stake in Toshiba Memory and a lot of cash in hand, or you have a company that continues to own a great business,” said an investor who participated in the share sale, declining to be identified as details of his firm’s investment have not been made public.

Read: Why Toshiba Is Still Weighing Its Options In Selling Its Prized Chip Unit

Toshiba plans to sell 2.28 billion new shares at 262.8 yen per share, a 10% discount to Friday’s close.

The move will result in a massive 54% dilution in earnings per share. Toshiba‘s shares, however, ended down just 5% at 275 yen as the risk of a delisting has largely been removed and as the capital raising had been expected.

Singapore-based fund Effissimo Capital Management, established by former colleagues of Japan’s best-known activist investor, Yoshiaki Murakami, will become the largest shareholder in Toshiba with an 11.34% stake. Effissimo declined to comment specifically on its investment in Toshiba.

The new share deal will see Toshiba pay a hefty 26 billion yen ($232 million) in combined fees to Goldman, domestic brokers and to lawyers.

In addition to the new share issue, Toshiba is aiming to plug its 750 billion yen ($6.7 billion) equity shortfall with tax write-offs it plans to gain from the expected sale of claims it has against Westinghouse. It also said it is looking at selling its Westinghouse-related assets.

Sources told Reuters in September that Westinghouse is working with investment bank PJT Partners Inc on a sale process.

Private equity firms Blackstone Group LP and Apollo Global Management LLC have teamed up to bid for the business while Cerberus Capital Management LP was in talks with U.S. nuclear power plant component provider BWX Technologies Inc (BWXT) about submitting a joint bid, the sources said at the time.

Delays in deciding on the buyer for the chip unit have meant that Toshiba may not obtain the necessary anti-trust clearance by the end of March.

Toshiba‘s chip joint venture partner Western Digital, which was spurned in the auction, also argues no deal can proceed without its consent and has sought an injunction through an international arbitration court.

Toshiba is demanding that Western Digital drop the litigation as a condition for the U.S. firm to invest in a new flash-memory chip production line.

The two companies held talks in the United States last week to settle the issue but have yet to agree on details, sources familiar with the matter said.

Toshiba has had a gun pointed at it by Western Digital and that has been working because Toshiba was facing the risk of being delisted, but now they aren’t. So the negotiation power changes in favor of Toshiba now,” said Claudio Aritomi, an analyst at CLSA.

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