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Toshiba set to miss deadline on ¥2 trillion chip sale, pushing back Bain Capital deal by at least a month

Bloomberg

After waiting more than a year to learn the fate of its memory chip business, Toshiba Corp. investors are going to have to hold on a little longer.

The technology giant is set to miss an initial deadline to close the ¥2 trillion ($19 billion) sale of the division by the end of March, pushing back the disposal of its biggest business by at least a month.

The deal with a group led by Bain Capital hasn’t yet been approved by Chinese regulators as they weigh the impact on the world’s biggest market for semiconductors. Even if clearance comes in the last two days of the month, that’s probably not enough time to complete all the processes to make it official. Under the agreement’s terms, the new deadline for closing would then be May 1 and Toshiba would need regulatory approval by April 13 to meet that.

Toshiba, which invented NAND chip technology, put the memory business on the auction block in 2017 as it sought to repair a balance sheet hammered by billions of dollars worth of losses from a push into nuclear energy. If the Bain deal falls apart, Toshiba has at least three options: re-negotiate the terms, potentially at a higher price, take the memory chip business public or retain the division.

“Most investors operate under an assumption that the sale will eventually go through,” said Hideki Yasuda, an analyst at Ace Research Institute. “But if it doesn’t, there is really no downside for Toshiba.”

Officials at China’s Ministry of Commerce are said to be concerned about the role of SK Hynix Inc., which is part of Bain’s group. The South Korean chipmaker may end up with a significant stake in the business, consolidating power among the top players, people familiar with the matter have said. The ministry could also impose conditions that would materially impact the value of the business, such as requiring Toshiba to freeze prices or separate its solid state disk and chip memory operations.

As of Thursday evening, Toshiba had yet to obtain approval from some antitrust authorities, but the company still plans to go ahead with the sale as soon as possible, spokesman Ryoji Shinohara said.

While the Tokyo-based company struck the deal with Bain when it was desperate to raise cash and avoid a delisting, it no longer needs the money. Toshiba boosted its capital with a ¥410 billion nuclear asset sale and ¥600 billion of new stock. At the same time, the memory chip business has become even more valuable: It generated ¥205 billion in operating income in the fiscal first half, almost 90 percent of the company’s total.

Making any changes would require navigating a broad group of stakeholders. Sumitomo Mitsui Banking Corp. and Mizuho Financial Group Inc., Toshiba’s main lenders, have helped the company stay afloat and are keen to be repaid, Ace’s Yasuda said. The banks will play a key role in any decision and won’t easily change their support for the current terms of the deal, he said.

The deal’s prospects beyond the May deadline become more murky. The issuance of new shares in December brought in new shareholders that could take a more active role in the company’s affairs. A total of about 60 funds, including David Einhorn’s Greenlight Capital, Daniel Loeb’s Third Point and Effissimo Capital Management Pte., hold about a third of Toshiba. A general shareholders meeting scheduled for late June could give them an opportunity to agitate for a better deal.

“These new shareholders bought in with expectations of growth,” Yasuda said. “They are the ones that are likely to think that Toshiba is better off with the chips as part of the group.”