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Toshiba Inks $18 Billion Deal to Sell Chip Arm to Bain Group

Sept. 28, 2017
After months of testy talks, Apple, Dell and other tech leaders involved in the Bain consortium are set to gain some control over Toshiba’s flash memory chip business.

Toshiba Corp. signed a final agreement to sell its flash memory chip business to a group led by Bain Capital for about 2 trillion yen ($17.76 billion), moving a step closer to completing the deal after months of contentious negotiations.

The Bain consortium includes major technology players Apple Inc., Dell Inc., SK Hynix Inc. and Japan’s Hoya Corp., while Toshiba itself will maintain a stake, the company said in a statement Thursday. The total value of the transaction may change depending on capital expenditures. The deal is aimed at keeping control of an important business in Japan, while securing the funding needed to help Toshiba repair its damaged balance sheet. 

The sale has been marked by fierce tensions between Toshiba and Western Digital Corp., its partner in the chips business. The U.S. company has argued it should have veto rights in any sale because of their joint ventures and tried to buy the business itself. Toshiba disputes its partner has such rights and solicited offers from a range of bidders, including Western Digital’s rivals. The U.S. company has already vowed to fight the sale to Bain through arbitration filings in the U.S.

True to the deal’s tumultuous nature, Bain called a press conference at Tokyo’s upscale Palace Hotel Thursday evening — only to cancel it as journalists arrived. The firm’s Japan chief explained its partners hadn’t all signed off on the event.

“We thought we could call for the briefing first and get everyone’s agreement in the meantime, but couldn’t,” said Yuji Sugimoto, head of Bain Capital in Japan. “From the business point of view, please rest assured that all of the parties are in agreement.”

Toshiba is under pressure to raise money by March to pay for billions of dollars in losses in its U.S. nuclear business — or see its shares delisted from the Tokyo Stock Exchange. Toshiba expects the deal to close by March 31.

The agreement’s signing is a step toward completing a deal that’s gone through innumerable twists since January. Bain had been selected as the preferred bidder in June, but couldn’t reach a final agreement because state-sponsored Innovation Network Corp. of Japan and Development Bank of Japan backed out of the private equity firm’s consortium in the face of Western Digital’s threats.

Apple played a central role in resolving the auction by providing financial support and ongoing demand. The iPhone maker is keen on the chip unit because of the importance of flash memory chips, used in every iPhone and iPad for storing photos, videos and other data. Only a handful of companies make the highest-end technology and the dominant player is Samsung Electronics Co., a fierce rival to Apple that controls about 40% of the global market for flash memory. Investing in the Toshiba unit helps keep the market competitive and improves Apple’s negotiating position.

Apple is investing 165 billion yen ($1.47 million) in Toshiba as part of the deal, the iPhone maker said in an e-mailed statement. It will receive an equity stake in return for the investment.

“Toshiba has been an important partner to Apple for many years and we’re proud to support the next phase of their development,” Apple said.

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

Western Digital reiterated its legal threats in the past week as Toshiba signaled it was close to a deal with Bain. The U.S. company warned that legal proceedings could drag on till 2019 and put the deal in jeopardy. It also plans an injunction to block the sale.

The Bain agreement calls for the sale to be consummated even if the litigation is unresolved. If that is the case, Toshiba will not transfer its three joint ventures with Western Digital to the acquirers and the purchase price will be adjusted accordingly, unless the transfer of the memory business itself is blocked by injunction, the statement said.

“This is definitely a step forward,” said Mana Nakazora, chief credit analyst at BNP Paribas SA in Tokyo. “But with Western Digital’s litigation still unresolved and considering the way this deal has played out so far, the situation needs to be observed with some caution.”

The acquisition will be funded by 350.5 billion yen from Toshiba ($3.11 billion), 212 billion yen from Bain ($1.88 billion) and 27 billion yen from Hoya ($239.77 million). Hynix will invest 395 billion yen ($3.51 billion), while U.S. investors will add 415.5 billion yen ($3.69 billion). The special purpose entity making the acquisition, Pangea, also intends to secure loans of about 600 billion yen ($5.33 billion).

Under the agreement, Japan’s Toshiba and Hoya will hold a majority of Pangea’s stock. The U.S. investors will not acquire any common stock or voting rights. Hynix has agreed not to increase its stake beyond 15% for 10 years.

Separately, private equity firms Blackstone Group LP and Apollo Global Management LLC are said to have teamed up to bid on Toshiba’s bankrupt nuclear power unit Westinghouse Electric Co. and others are considering offers. That deal would also help clean up Toshiba’s balance sheet.

By Pavel Alpeyev and Yuki Furukawa

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