/

Western Digital makes case for taking over Toshiba chip unit

by , and

Bloomberg

Western Digital Corp. is making a forceful case for its bid to take control of Toshiba Corp.’s memory-chip business amid a fierce bidding war.

The San Jose, California-based company is in talks with state-backed investment funds Innovation Network Corp. of Japan and Development Bank of Japan Inc. about options for a bid, said Mark Long, Western Digital’s chief financial officer, during an interview in Tokyo. Long also suggested his company has held discussions with Apple Inc.

Western Digital became Toshiba’s manufacturing partner in the flash-memory business when it acquired SanDisk Corp. for $15.8 billion last year. That investment is now under threat after Toshiba narrowed the list of contenders to a group that includes Western Digital’s rivals, including Taiwan’s Hon Hai Precision Industry Co., South Korea’s SK Hynix Inc. and chipmaker Broadcom Ltd. Toshiba should negotiate with Western Digital first, Long said.

“We think very differently, our priorities, first and foremost are focused on the joint venture remaining competitive,” said Long, who was in Japan on Thursday for meetings.

Apple, which uses memory chips in iPhones and other devices, is said to be among the potential investors in Toshiba. Asked about whether Western Digital has talked with Apple about getting its backing, Long said his company has “had conversations with almost everyone” involved in the process.

Toshiba is aiming to complete the sale of the chips unit by March 2018 to raise much-needed cash. The potential offers, which are nonbinding at this point, have come in at about ¥2 trillion, with Hon Hai indicating its willingness to pay as much as ¥3 trillion. While the large size of the deal has made it necessary for bidders to seek partners to ease the financial burden, participation by Japanese companies may be key to regulatory approval.

“While others are working through a process, we have a clearer picture of what the business should be valued at and how to think about other things that affect value,” Long said. “We have lots of different ways to participate in the solution than other players. It’s more complicated than a single number.”

Western Digital raised its objections to the sale in a letter from Chief Executive Officer Steve Milligan to Toshiba’s board members on April 9. He argued that the rumored bidders were unsuitable and the reported prices offered were above the fair and supportable value of the chip business. The CEO’s letter cautioned in particular against accepting a bid from Broadcom, which has led the wave of consolidation in the chip industry over the past two years.

“We know that their situation is extremely stressful, challenging,” Long said, referring to Toshiba. “We do want them to understand that we want to help provide a good solution. We have to make sure that at a minimum it doesn’t hurt us.”

Toshiba disagrees with the assertion that a sale would violate the agreement between the two companies; the Japanese company plans to respond with a letter of its own, but has other options if the issue isn’t resolved, a Toshiba executive said.

Long said that Western Digital has had a “great dialog” with INCJ and DBJ. A Toshiba executive indicated last month that the company would welcome a bid from the state-backed investors. The Yomiuri newspaper reported that INCJ and DBJ were considering a joint bid to take more than a 30 percent stake.

“They are definitely part of the deliberative process that’s thinking about the long-term solution, their concerns and their goals are probably the easiest for us to relate to,” Long said of the two Japanese investors.

Toshiba is selling assets to contend with enormous writedowns in its Westinghouse nuclear business, stemming from cost over-runs and construction project delays. The technology giant put Westinghouse into Chapter 11 bankruptcy protection and said it may book a loss of as much as ¥1.01 trillion for the year that ended in March.

Aside from the legality of the sale, Western Digital may struggle to match rival bids. The purchase of SanDisk has strained the company’s balance sheet, leaving it with net debt of $8.9 billion as of December. In January, Western Digital said it had cash and cash equivalents of $5.2 billion. The company said in January it had “liquidity available” totaling $6.2 billion.

The CFO said Western Digital is considering various options for paying for the business, including preferred shares.