Toshiba Officially Signs Deal to Sell Chip Unit

Struggling Japanese firm Toshiba has made a deal to sell its memory chip unit, Toshiba Memory, to a consortium led by US private equity firm Bain Capital on Thursday. The agreement is worth about 18 billion dollars.

Toshiba and Japanese glass maker Hoya will acquire a major stake in the memory chip unit. The two firms will have a combined 50.1 percent of voting rights.

Four other US companies, including Apple and Dell, will also invest. But they will not obtain voting rights.

South Korean semiconductor maker SK hynix will not be an investor, but will provide a different form of financial support.

The arrangement is designed to make it easier for the deal to pass antitrust screenings in various countries. SK hynix will not be allowed to own more than 15 percent of the voting rights for 10 years.

Two Japanese state-backed entities, the Innovation Network Corporation of Japan and the Development Bank of Japan, are also considering investments.

But their funding would come only after a dispute is resolved between Toshiba and its US partner Western Digital.

Western Digital opposes the deal and has filed a complaint with the International Court of Arbitration.

Toshiba, however, hopes to fast-track the sale. Executives are eager to bring its net worth into the black by next March to avoid having the firm's shares delisted from the Tokyo Stock Exchange.

Japan's Industry Minister welcomes the deal

On Thursday, Japan's Industry Minister Hiroshige Seko stressed the need to secure jobs in the country and prevent Japanese technology from leaking overseas. He said the deal addresses both points.

Bain: Toshiba Memory will be more competitive

US private equity firm Bain Capital is the main player in the consortium that will purchase Toshiba Memory.

Yuji Sugimoto, who heads Bain's Japanese arm, says Toshiba Memory will be far more competitive in the global market when it becomes independent. He pledged to work with management and employees to ensure the firm's success.

Details of the deal

The purchase of Toshiba Memory will be carried out in two stages and is expected to cost nearly 18 billion dollars. In the first stage, Bain and other private companies, including Toshiba, make investments.

Bain will put in nearly 1.9 billion dollars. Toshiba will contribute 3.1 billion dollars and obtain 40.2 percent of voting rights. Hoya will provide nearly 240 million dollars for 9.9 percent of voting rights. The result is Japanese control of 50.1% of the voting rights of the firm.

US firms Apple, hard disc manufacturer Seagate Technology, semiconductor manufacturer Kingston Technology and PC manufacturer Dell will invest a total of about 3.7 billion dollars. But they will not obtain voting rights.

Meanwhile, South Korean semiconductor manufacturer SK hynix will not be an investor, but it will provide about 3.5 billion dollars to Bain. Bain will launch a new company to purchase Toshiba Memory and SK hynix will take part in this company. Bain will be its largest single shareholder.

The second stage of investment will be discussed after the conflict between Toshiba and Western Digital is resolved.

State-backed Innovation Network Corporation of Japan and the Development Bank of Japan are prospective investors in the second stage. This should allow the Japanese camp to maintain the initiative in managing the company.

Toshiba still faces challenges

Even if the deal to sell Toshiba Memory proceeds smoothly, Toshiba's rebuilding efforts still face challenges. The deal will have a significant impact on Toshiba's earning power.

Toshiba projects an operating profit of about 3.8 billion dollars for the fiscal year ending next March. Of this, about 3.7 billion dollars is coming from its semiconductor business. Most of this profit is from NAND flash memory, which is made by Toshiba Memory. In other words, Toshiba will lose its top earner which accounts for more than 90 percent of profits.

Toshiba plans to make social infrastructure the core of its business. But the projected operating profit is only about one-tenth of the semiconductor's.

So the success of Toshiba's rebuilding depends on how much it can boost profitability through business expansion and improved efficiency. Another challenge is a risk Toshiba faces in its energy business.

Four years ago, Toshiba signed a contract to have a subsidiary of US energy firm Freeport liquefy natural gas procured by Toshiba for 20 years starting 2019. Toshiba hopes to sell the liquefied gas. But if it fails to find enough buyers, the business could incur losses since Toshiba will have to pay commission fees to Freeport, whether it makes profits on the deal or not.

Bain abruptly cancels news conference

Bain cancelled a news conference it had planned to hold in Tokyo on Thursday. Officials were to brief reporters on the deal with Toshiba. But the conference was called off at the last minute.

Yuji Sugimoto, the chief of Bain's Japanese unit, said he couldn't gain a consensus on holding the news conference from the related parties. But he said that everyone involved agrees on the direction and the strategy they will pursue.

The cancellation, however, suggested there may be disarray among the consortium members.