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Western Digital-Toshiba War Turns Nasty, Bain Files New Bid

Zacks

The ongoing war over Toshiba Corp’s flash memory chip business recently intensified with Western Digital WDC filing an injunction appeal to block the sale and a consortium led by private equity firm Bain Capital LP submitting a new bid.

Suitors Continue to Flock for the Chip-Unit

We note that Toshiba is the second largest NAND flash memory maker, a technology that is now preferred over legacy hard-drive storage systems due to speed and reliability. The company is in dire need to raise capital to remain as a listed entity.

Currently, the company has negative shareholder’s equity after it posted a massive loss of 950 billion yen (almost $8.6 billion) in the fiscal year ended March. Most of the loss can primarily be attributed to write-downs related to its now-bankrupt Westinghouse nuclear business.

The chip-unit, which Toshiba values at 2 trillion yen, has attracted a number of suitors including Western Digital. The list is quite extensive with companies like Broadcom AVGO and private equity firm Silver Lake Partners as well as Foxconn along with Apple AAPL and Dell.

Most recently, Bain Capital along with Innovation Network Corp of Japan (INCJ) and Development Bank of Japan (DBJ) has reportedly submitted a bid of 2.1 trillion yen (approximately $19 billion). Broadcom is currently the leading contender with a 2.2 trillion offer (almost $20 billion).

Western Digital–Toshiba Relation Sours Further

Western Digital’s division SanDisk and Toshiba jointly runs a flash memory factory in Japan. Based on the joint venture (JV) agreement, the U.S.-based storage provider insists that it has rights to approve or disapprove any transaction that involves the partnership.

However, Toshiba counterclaimed that the JV agreement doesn’t give the right to either party to block the other from selling its share. It also pointed out that Western Digital itself bought SanDisk without seeking or receiving Toshiba’s approval.

Western Digital Corporation Revenue (TTM)


Western Digital Corporation Revenue (TTM) | Western Digital Corporation Quote

Reportedly, Western Digital’s initial offer of 1.5 trillion yen failed to gain approval from Toshiba. Instead the company preferred a higher bid from Broadcom. The U.S.-based chip-maker is expected to face less regulatory headwind as it is not currently involved in the memory chip business.

We believe that loss of Toshiba’s technology and operations will be a severe blow to Western Digital as it will hurt its competitive position in the rapidly growing NAND flash memory market against the likes of Seagate STX. Broadcom’s win will further intensify the company’s woes, which can affect its top-line growth.

To avoid such a situation, Western Digital is seeking arbitration with Toshiba, which usually takes 16-24 months. To stall the proposed transaction, the company recently sued the Japanese conglomerate in a California court.

Per Reuters, Western Digital expects to get a ruling over its injunction appeal by mid-July. However, that may not be able to stop the divestiture process, which Toshiba is striving to complete by the end of June.

Shares fell 0.6% to close at $87.31 on Jun 15. The stock has return 28.5% on a year-to-date basis, which is much better than the S&P 500’s gain of 9.2%.



Bain Consortium Gains Japanese Government Backing

According to Bloomberg, Bain lead consortium is supported by the Japanese government, which initially backed Western Digital. However, the U.S.-based company’s recent aggressive legal stance has alienated the Japanese government, which now seems to prefer a Japanese control over the deal.

Reportedly, INCJ will contribute 300 billion yen in equity, while DBJ will contribute another 300 billion yen in preferred shares and equity. Per Reuters which quoted Asahi newspaper, stated that South Korean chip-maker SK Hynix Inc. will provide loans in the tune of 300 billion yen to the group.

Toshiba itself would contribute up to 100 billion yen and other Japanese firms a combined 140 billion yen. Bank of Tokyo Mitsubishi UFJ is expected to invest 400 billion yen. Additionally, Bain is also engaged in discussion with rival private equity KKR & Co. to make it join the consortium.

We believe that the new bid now makes it more difficult for Western Digital to acquire the assets. Per Reuters, the company plans to raise its offer to $18 billion or more, which may not be enough to outsmart the other bidders.

Currently, Western Digital carries a Zacks Rank #1(Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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