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Toshiba’s chip unit sale may be a done deal but regulatory and legal hurdles loom ahead

by

Kyodo

Eight months after announcing its plan to sell its chip unit, Toshiba Corp. has finally selected a buyer following a protracted and chaotic sales process. But the embattled tech giant faces big hurdles ahead as it tries to fix its finances and remain a listed company.

The chip unit deal is subject to regulatory screenings in major markets, and a lengthy process may prevent the Japanese conglomerate from raising necessary funds in time. Also looming ahead are challenges from a legal battle with Toshiba’s longtime U.S. partner, whose bid for the unit has been rejected.

Further concern about Toshiba’s future is its perceived lack of leadership — an impression made by the months-long bidding process for the chip unit, characterized by indecision and confusion, which came following a series of scandals, analysts said.

On Wednesday, Toshiba said it will sell Toshiba Memory Corp. to a Japan-U.S.-South Korean consortium for ¥2 trillion ($17.8 billion) after failing three times to meet a target date to announce a deal.

“Toshiba has taken a major step forward,” said Hideki Yasuda, a senior analyst at the Ace Research Institute. But he also warned of lingering uncertainty, saying that Toshiba’s chances of ending its financial crisis is “still not 100 percent.”

One major issue raised during the bidding process was whether Toshiba will receive approval from antitrust examiners for the planned deal.

Toshiba Memory will go through regulatory scrutiny in major markets but concerns remain that antitrust reviews, especially in China, could become lengthy and take at least six months or more. Some describe China’s screening as a “black box” given its opaque screening standards.

The consortium, led by U.S. investment fund Bain Capital, also includes South Korean chipmaker SK Hynix Inc. The combined global market share of Toshiba Memory and SK Hynix is nearly 30 percent, approaching the 35 percent share held by industry leader Samsung Electronics Co. of South Korea.

Chinese regulators could take a tough stance on the Toshiba deal as part of efforts to foster growth of China’s own chip industry.

But Toshiba has no time to lose as it needs cash to cover massive losses stemming from its now-bankrupt U.S. nuclear unit Westinghouse Electric Co. and avoid reporting next March a negative net worth for a second straight year. Without eliminating its excess liabilities, Toshiba will face a forced delisting from the Tokyo Stock Exchange.

A TSE spokeswoman said Toshiba will need to receive the money paid for the chip unit by the end of March, and even the slightest delay will not be tolerated.

“If Toshiba says that it will have the cash in May, it will still be delisted. Our rules make no exception,” the spokeswoman said, adding that changing the rules would not be easy. “We are not in a position where we can simply change our rules for a single company.”

Toshiba was placed on the TSE’s watch list earlier this year after the nuclear unit accounting scandal emerged in 2015. The bourse is assessing whether Toshiba’s internal controls have improved.

After first announcing a write-down related to Westinghouse in December, Toshiba repeatedly failed to submit its earnings reports on time, with its auditor criticizing the company’s internal controls.

Another sticking point for Toshiba is the legal dispute with Western Digital Corp. a joint owner of Toshiba’s flash memory plant in Japan.

Western Digital has taken Toshiba to court claiming that selling the chip unit without its consent breaches their contract.

An international court of arbitration will start examining the legal dispute this month or in October, sources close to the matter said.

“The biggest question is what is going to happen with the legal case with Western Digital,” said Masayuki Kubota, chief strategist at Rakuten Securities Inc. “The situation is still unclear for investors.”

At one point, Toshiba and Western Digital reached a broad agreement on the chip unit sale after Toshiba’s talks with the Bain-led consortium hit a snag.

But Toshiba held out on making a final decision amid pressure from various stakeholders including creditor banks and possibly the Japanese government, and then returned to the negotiation table with the consortium.

That vacillation in the face of extreme pressure to resolve a crisis seemed to show disarray in Toshiba’s own top management, with some sources pointing to conflicts between the president and top deputy.

Satoshi Tsunakawa became the president of Toshiba in June 2016 after an accounting scandal surfaced. The former head of Toshiba’s medical equipment unit took the helm after that unit was sold to Canon Inc. last year.

But a U.S. investment fund executive said, “It seems he has no authority.”

Vice President Yasuo Naruke, who also heads Toshiba Memory, is widely seen as wielding strong influence within the company, given the importance of the prized chip unit.

Naruke opposed the proposed sale of the unit to Western Digital.