Toshiba Sues to Propel Sale -- WSJ

By Takashi Mochizuki Features Dow Jones Newswires

Western Digital stands in the way of the group's effort to unload chip business

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This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the US print edition of The Wall Street Journal (June 29, 2017).

TOKYO -- Toshiba Corp.'s future turned even murkier as it filed suit to stop a business partner from blocking the sale of its semiconductor business, meant to plug a gaping financial hole.

The struggling conglomerate is racing to raise about $20 billion from the sale to a Japanese-government-led consortium -- against the opposition of Western Digital Corp., which has a stake in the business. Toshiba had aimed to announce a deal by Wednesday with the consortium, which includes South Korean chip maker SK Hynix Inc., a Western Digital competitor.

Instead of announcing the deal agreement, Toshiba asked the Tokyo District Court to suspend a legal motion filed by Western Digital to halt the sale, and to award it Yen120 billion ($1.06 billion) in damages. Western Digital, which argues that its joint-venture contract with Toshiba gives it veto power over any sale, had filed the motion with a state court in California earlier this month.

Western Digital submitted a new proposal to buy the operation itself on Tuesday, with U.S.-based private-equity firm KKR & Co.

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A deal is critical for Toshiba because it has negative shareholder equity of Yen581.6 billion following the chapter 11 bankruptcy filing by its Westinghouse Electric Co. subsidiary. The conglomerate will be removed from the Tokyo Stock Exchange if it fails to fix its financial standing by next March.

Some analysts said Toshiba's legal action could backfire by prolonging the dispute and slowing the sale. It might have been quicker to seek a settlement, they say.

"This means a war which Toshiba looks likely to lose," said Amir Anvarzadeh, head of Japanese equity sales at BGC Partners, a brokerage. "Toshiba is running out of time."

At a shareholders meeting Wednesday, Toshiba Chief Executive Officer Satoshi Tsunakawa said that Western Digital is "unreasonably interfering." A Western Digital spokeswoman declined to comment.

Toshiba had initially aimed to pick a buyer for the chip unit by March. After postponing a decision several times it missed its latest self-imposed deadline: the shareholders meeting. Toshiba executives apologized at the meeting for the delay, and said they would confirm a sale as soon as possible. They didn't name a new target date.

Taiwan's Foxconn Technology Group and Broadcom Ltd. of the U.S. were among other bidders for Toshiba's NAND flash-memory operation, enjoying a boom thanks to demand for the memory for smartphones and computer servers.

But Toshiba selected as its preferred bidder a group led by state-backed fund Innovation Network Corp. of Japan and 100% government-owned Development Bank of Japan, joined by U.S. private-equity firm Bain Capital and SK Hynix. It called the group's proposal the best "not only in terms of valuation, but also in respect to certainty of closing, retention of employees, and maintenance of sensitive technology within Japan."

The selection of a Japanese-government-led group angered some, including Terry Gou, chairman of iPhone assembler Foxconn, formally known as Hon Hai Precision Industry Co. Hiroshige Seko, Japan's economy minister, said the administration hadn't intervened.

Western Digital made several proposals to buy the operation, including one to join the government-led group. Toshiba's Mr. Tsunakawa said it didn't pick the U.S. partner because Western Digital hadn't participated in the formal bid process.

Analysts say that unless Toshiba can reach a settlement with Western Digital, the U.S. company is likely to employ every possible step to slow the deal process.

"If a consortium with the Japanese government was a must, Toshiba should have made more effort to pull in Western Digital, not its competitor SK Hynix," Waseda Business School professor Atsushi Osanai said.

The Toshiba-Western Digital relationship now looks irretrievably broken. Toshiba said that in addition to filing suit, it had cut off Western Digital's access to their joint-venture database to protect Toshiba's intellectual property.

Analysts say the only winner from the dispute is Samsung Electric Co., which holds top share in the NAND flash-memory market, according to IHS Markit. As the legal battle between Toshiba and Western Digital drags on and makes business planning harder, Samsung has the opportunity to boost chip investment and bolster its advantage.

Write to Takashi Mochizuki at takashi.mochizuki@wsj.com

(END) Dow Jones Newswires

June 29, 2017 02:47 ET (06:47 GMT)