Toshiba Corp. is fast approaching a cliff on the path to reconstruction after its semiconductor business partner Western Digital Corp. announced Monday it is seeking international arbitration over the struggling tech giant’s plan to sell its flash memory business.
To offset a massive liability tied to U.S. nuclear unit Westinghouse Electric Co., Toshiba desperately needs cash by selling the chip business, which is valued at about ¥2 trillion, according to the company.
However, Western Digital’s move to take the matter to the International Chamber of Commerce puts a roadblock in the plan and might delay the sale.
On Monday, Toshiba announced its projected earnings for fiscal 2016, and the Tokyo-based electronics conglomerate had a negative net worth of ¥540 billion as of the end of March.
Operating profit is forecast at ¥270 billion, but its net loss could be a staggering ¥950 billion after it had to wear the huge cost of Westinghouse’s Chapter 11 bankruptcy filing.
It is unlikely that Toshiba will be able to clear up the liability without selling the flash memory business. Moreover, the Tokyo Stock Exchange will delist firms that report negative net worth for two consecutive fiscal years, according to TSE rules.
In April, Toshiba spun off its flash memory business as Toshiba Memory, aiming to sell more than a majority stake of the business to other firms.
However, Western Digital CEO Steve Milligan said in a statement that spinning off the business and selling stakes in it without consent from SanDisk, a subsidiary of Western Digital that operates the semiconductor business with Toshiba, was “explicitly prohibited” in an agreement between the two firms.
“Seeking relief through mandatory arbitration was not our first choice in trying to resolve this matter. However, all of our other efforts to achieve a resolution to date have been unsuccessful, and so we believe legal action is now a necessary next step,” Milligan said.
He said the company was “confident in our ability to protect our rights and interests and to improve our value creation opportunities.”
Toshiba maintains that it has not violated the agreement.
Speaking at a news conference at Toshiba headquarters the same day, President Satoshi Tsunakawa said, “We will continue to stress the validity of our plan to dispel concerns” among related parties.
Arbitration will take place in San Francisco, Western Digital said. Each side will nominate one member of the three-person panel. The third will serve as chairman, to be chosen by either both the two nominated members or the International Chamber of Commerce, which oversees the arbitration. The process may take as long as a year. Any move to undermine arbitration, such as a sale of the unit before the panel reaches a decision, could force the case to go to court.
The type of chip produced by the joint venture between Toshiba and Western Digital, known as flash memory, is enjoying a bumper year. Micron Technology Inc., Samsung Electronics Co. and SK Hynix Inc. have all reported strong demand for the product as the industry moves away from magnetic disks in computer storage. Toshiba’s sale has garnered significant interest, with preliminary bids as high as $26 billion from Hon Hai Precision Industry Co., Bloomberg reported last month.
Asked whether Toshiba may be considering other options if the sale of the flash memory business cannot be done within fiscal 2017, Tsunakawa said it was not considering such a plan.
Should the sale go through as planned, Toshiba projects that it will return to the black in fiscal 2017 with an estimated operating profit of ¥200 billion and a net profit of ¥50 billion.
Along with the fate of the chip business, Toshiba has also had trouble with getting auditor approval for earnings reports.
Last month, Toshiba disclosed an unaudited report for the April-December period in 2016 after twice missing a deadline, as PricewaterhouseCoopers Aarata LLC., Toshiba’s auditor, said it was still reviewing whether Toshiba provided credible figures for the losses by Westinghouse.
Toshiba is required to submit an annual report that must have an opinion from the auditing firm by the end of June, but it remains unclear whether Toshiba can meet the deadline. Failing to do so will also increase the risk of the company being delisted from the TSE.
Information from Bloomberg added.
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