Bain-Led Group to buy Toshiba chip unit in $18 billion deal

 21 Sep 2017 - 0:00

Bain-Led Group to buy Toshiba chip unit in $18 billion deal
This file photo taken on February 14, 2017 shows man walking past the logo of Toshiba Corp displayed at the company's headquarters in Tokyo. AFP / Behrouz Mehri

By Pavel Alpeyev and Yuki Furukawa / Bloomberg

Toshiba Corp.’s board agreed to sell its flash memory chip unit to a group led by Bain Capital for 2 trillion yen ($18 billion), taking an important step toward ending a contentious bidding process that has stretched over eight months.

The Bain consortium includes backing from Japanese and overseas companies, including Toshiba, which will reinvest 350.5 billion yen, the company said in a statement. Apple Inc., Dell Inc., SK Hynix Inc. and Japan’s Hoya Corp., will provide financial support, according to people familiar with the situation. The iPhone maker played a crucial role in swinging momentum in the tumultuous auction to the Bain offer.

Apple is interested in the chip unit because of the strategic importance of flash memory. The compact chips are essential for its iPhones and iPods, storing every photo, video clip and animoji. Only a handful of companies make the highest-end technology and the dominant player is Samsung Electronics Co., the world’s second-largest chipmaker, which controls about 40 percent of the market for flash memory. Investing in the Toshiba unit may help keep the market for the vital chip component competitive, while any further strengthening of Samsung’s position may toughen price negotiations for companies such as Apple, which compete with it in other areas.

Bain, meanwhile, is betting on huge demand and rising prices for memory chips in a market with only a handful of players that can afford to build plants.

Toshiba is selling off its chips business to pay for billions of dollars in losses in its U.S. nuclear business. The company needs to raise the money by March to avoid seeing its shares delisted from the Tokyo Stock Exchange. Toshiba expects the deal to close by March 31 and aims to restore a positive net worth by the end of the fiscal year, according to the statement.

Legal Action

The auction has been complicated by legal action from Western Digital Corp., which has argued it should have veto rights in any sale because of its partnership with Toshiba in the chips business. The Japanese company disputes that and sued Western Digital for more than $1 billion for interfering in the auction.

Western Digital has also sued in court and filed for arbitration in California to make its case. As part of Wednesday’s agreement, Bain agreed to complete a deal regardless of the legal challenges. Shares of Western Digital fell as much as 6.5 percent Wednesday to $84.12.

To read a Gadfly column about the legal battle, click here

Western Digital’s exclusion from the deal and worsening relationship with Toshiba may undermine a $15.8 billion bet on the market it made last year in buying SanDisk Corp. to gain access to manufacturing of the chips that are overtaking its computer storage business. SanDisk is a joint-venture partner in producing the chips with Toshiba and as a result of its purchase, Western Digital has a joint-venture manufacturing agreement with Toshiba.

If the dispute with Western Digital is unresolved at closing, three joint ventures between Toshiba and Western Digital would not be transferred to Bain and the purchase price would be adjusted, said one of the people, asking not to be identified because the matter isn’t public. The joint ventures, which are important for Western Digital to control manufacturing and pricing of the chips, are worth less than 5 percent of the chips unit, the person said.

The Bain-led group was identified as a preferred bidder almost three months ago, but the process has been delayed by the lawsuits, government opposition and corporate indecision. Toshiba chose Bain over a group led by KKR & Co. and two state-backed funds, Innovation Network Corp. of Japan and Development Bank of Japan. Western Digital had originally been part of the KKR group, but agreed to withdraw because of opposition from Toshiba.

Twists and Turns

Toshiba’s board agreed to the Bain proposal at a meeting Wednesday. Under the agreement, Bain, Toshiba, SK Hynix and Japan’s Hoya will pay about 960 billion yen for common and convertible stock, while Apple, Dell, Kingston Technology Co. and Seagate Technology Plc will spend about 440 billion yen for convertible and non-convertible preferred stock, a person familiar with the matter said. The special purpose entity making the acquisition will be called Pangea and receive about 600 billion yen in loans, the person said.

Seagate, which is investing $1.25 billion for non-convertible preferred stock, doesn’t want equity ownership, preferring the memory chip business to stay independent, according to a person familiar with the matter. The threat of Western Digital’s litigation scared off some Japanese financing sources, causing Bain to scramble for more partners in the consortium, according to people familiar with the discussions. Seagate helped bring in Hoya Corp., another Japanese company, which calmed Toshiba, one of the people said, and helped the deal go forward.

The auction has gone through dizzying twists and turns. Last week, Toshiba signed a memorandum of understanding with Bain, with the goal of reaching a final deal before the end of the month. But the MOU didn’t preclude Toshiba from continuing to negotiate with other bidders.

This week, KKR and Innovation Network Corp. worked on a revised bid, with the Japan fund taking a more prominent role in the consortium and planning an initial investment of about 550 billion yen, up from the previous 300 billion yen, people familiar with the matter said. Under the revised proposal, Toshiba could buy back equity from INCJ and Development Bank of Japan later, the people said.

Bain then revised its offer too. The U.S. buyout firm sought more financial support from Apple, asking for about $7 billion in capital, up from a previous agreement for about $3 billion, said a person familiar with the matter. It’s not clear exactly how much capital Apple will ultimately contribute to the offer.