The surprise takeover bid for Toshiba Corp. is a palpable demonstration of the growing influence in corporate Japan of activist investors, who have gone from largely impotent onlookers to kingmakers in the space of just a few years.
The offer from CVC Capital Partners, while still in the early stages, comes just weeks after Toshiba Chief Executive Officer Nobuaki Kurumatani lost a landmark shareholder vote, forcing an independent investigation into alleged issues with voting at its annual general meeting last year.
That loss has piled pressure on Kurumatani, who barely won re-election at last year’s meeting and is seen as unlikely to survive another. The vote was triggered by Toshiba’s largest shareholder, the secretive Singapore-based hedge fund Effissimo Capital Management.
Any deal for Toshiba faces legal hurdles, and analysts say that investors such as Effissimo would likely insist on a substantial premium from Tuesday’s closing price. But the episode shows that the influence of activism in Japan is becoming hard to deny.
"There have been false dawns before,” said Justin Tang, head of Asian research at United First Partners in Singapore. "But activism is taking hold now.”
Flexing muscles
CVC offered about ¥5,000 per share in its buyout proposal, according to a Toshiba executive. A bid at that level would value Toshiba at about ¥2.28 trillion ($20.7 billion) and represent a 31% premium to its last close before news of the bid emerged, data compiled by Bloomberg shows.
That would make it the largest private equity-led buyout since 2013, and CVC’s biggest acquisition on record. Toshiba’s board plans to form a special committee to consider the proposal, said the executive, who asked not to be identified discussing confidential information.
While there are many hurdles to a deal taking place, Toshiba shares rose by their daily limit of 18% to ¥4,530 per share at the close Wednesday in Tokyo. The stock gained as much as 5.7% more on Thursday.
"Considerable value would be created simply by simplifying ownership and clarifying governance by taking the company private,” said Nicholas Benes, an expert on Japanese corporate governance. "Precisely because of that, one would very much hope that this is a case where Toshiba will be open to other bids, by both other PE firms as well as strategic acquirers.”
Activist investors have increasingly been flexing their muscle in Japan in recent years, as corporate governance reforms promoting shareholder value have meant management can no longer dismiss such pressure.
Tokyo Dome Corp. will be delisted this month after acquisition by a white knight last year to fend off pressure from activist investor Oasis Management Co.
Once a storied name in Japan, Toshiba has faded dramatically since its glory days, after years of management missteps and scandal.
The conglomerate invented flash memory three decades ago, but it was forced to sell most of its prized chip business in 2018 because of losses in its nuclear-power operation. That deal led to an infusion of cash — but also a large contingent of more vocal shareholders. Last week, Singapore fund 3D Investment Partners became the latest investor to say it may make proposals to management, boosting its stake to more than 7%.
"Any successes of this nature will probably snowball and lead to more activity,” said Damian Thong, an analyst at Macquarie Group Ltd. "There is a sense that a large part of Japan’s industrial base is being run inefficiently, resulting in apparent undervaluation of Japanese conglomerates.”
Kioxia options
One open question for Toshiba is the future of Kioxia Holdings Corp., its former memory-chip division in which it still holds the biggest stake.
Kioxia is focused on going public as soon as this summer in an IPO that could value the business at more than $36 billion, according to reports last week. Alternatively, Micron Technology Inc. and Western Digital Corp. are each said tobe interested in acquiring the firm.
If Toshiba secures a reasonable market valuation for Kioxia, and its core businesses attract multiples similar to those of its Japan peers, Thong said he sees scope for over ¥1 trillion of shareholder value creation. That would imply a Toshiba share price of over ¥6,500 per share, compared with the CVC offer at ¥5,000 apiece.
Mio Kato of LightStream Research sees a low possibility of the deal going through under current terms, and expects volatile trading for Toshiba’s shares in the near term depending on how things develop. Toshiba’s shareholders, especially activists, will want a rather "steep price,” he wrote in a note.
Given the sensitivity around several of Toshiba’s businesses, including its deep involvement in decommissioning the wrecked Fukushima No.1 nuclear power plant, government approval would be required for the deal, Chief Cabinet Secretary Katsunobu Kato said Wednesday.
It’s unclear if a foreign firm such as CVC would be allowed to take control of Toshiba. The relationship between CVC and Toshiba executives — with Kurumatani a former Japan president and external director Yoshiaki Fujimori still employed by the firm — has also raised eyebrows.
"This could simply be an attempt to buy time for Kurumatani,” Kato said.
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