Toshiba Hasn't Revealed That SK Hynix Could Get Stake in Its Chip Business

By Takashi Mochizuki and Kosaku Narioka in Tokyo and Eun-Young Jeong in Seoul Features Dow Jones Newswires

A plan for the sale of Toshiba Corp.'s semiconductor unit includes an option for SK Hynix Inc. to eventually take a minority stake in the business, people involved in the proposed deal say, contradicting Toshiba's public statements.

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SK Hynix's potential partial ownership of Toshiba's chip business could escalate opposition from Western Digital Corp., which currently has a stake in Toshiba's semiconductor operations and competes with SK Hynix, a South Korean chip maker. Western Digital, based in San Jose, Calif., has filed lawsuits to try to block the sale.

The arrangement would also appear to run counter to concerns raised by Japanese government officials about the potential leakage of sensitive technology to foreign competitors.

Toshiba says it is nearing an agreement with a consortium led by state-backed fund Innovation Network Corp. of Japan, to sell its crown jewel semiconductor business, which makes NAND flash memory chips, for about $18 billion.

INCJ and 100% government-owned Development Bank of Japan plan to acquire 66% of the unit, while the rest would go to U.S. private-equity firm Bain Capital, according to the people involved in the deal.

Contracts between Bain and SK Hynix will allow SK Hynix to acquire some or all of the stake initially held by Bain at a later date, these people say.

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SK Hynix's name isn't included in Toshiba's public documents about the consortium but it has been described by Toshiba Chief Executive Satoshi Tsunakawa as only providing financing for the deal.

"There won't be any technology leaks because SK Hynix won't take any voting rights in the chip unit," Mr. Tsunakawa said at a news conference on June 23.

A Toshiba spokesman said he couldn't comment on details of the planned sale and declined to make Mr. Tsunakawa available for comment.

In explaining SK Hynix's role, one of the people involved in the deal said: "SK Hynix isn't a bank that profits from lending money."

The INCJ and DBJ declined to comment. An SK Hynix spokesman declined to comment on whether the South Korean company is looking to acquire a stake in Toshiba.

Western Digital has already expressed concerns about SK Hynix's inclusion in the consortium.

"SK Hynix's participation increases the likelihood of technology leakage and harm to the joint venture," Western Digital Chief Executive Steve Milligan wrote in a letter sent to Toshiba on June 25, which was provided to the media.

A spokesman for Japan's Ministry of Economy Trade and Industry said the ministry couldn't immediately comment.

Toshiba is rushing to raise capital after its U.S. nuclear subsidiary Westinghouse Electric Co. filed for chapter 11 bankruptcy protection in March, saddling Toshiba with billions of dollars in losses. In April, Toshiba warned investors that it might be unable to stay in business.

SK Hynix was invited to join the consortium after INCJ failed to attract Japanese electronics companies, the people involved in the process say. The addition of SK Hynix was needed to raise the size of the offer, the people involved in the deal said.

Japanese government officials have raised concerns about technology leakage, but that was primarily regarding Chinese bidders as Beijing spends tens of billions of dollars to buy semiconductor technology overseas and develop it domestically.

Toshiba and SK Hynix have fallen out in the past over alleged technology leakage.

In 2014, Toshiba alleged that SK Hynix illegally obtained semiconductor research data from a former employee of a Toshiba joint venture partner that was acquired by Western Digital last year. SK Hynix agreed to pay Toshiba $278 million to settle a lawsuit in the dispute. The two companies extended a license-sharing agreement shortly after resolving the dispute.

A stake in the Toshiba unit would help give SK Hynix a bigger presence in the NAND chip market, where it lags behind in technology and market share. Thanks to high demand from smartphone and computer server makers, sales of NAND flash memory chips totaled $11.7 billion during the first quarter of this year, headed by Samsung Electronics Co. and Toshiba and followed by Western Digital and SK Hynix, according to research firm IHS Markit.

SK Hynix says it is currently investing billions of dollars to beef up its NAND production capacity.

SK Hynix's potential stake in Toshiba's chip unit could also raise antitrust challenges that would slow the sale. Toshiba rejected Western Digital's offers to take over the operations due partly to concerns that authorities, especially in China, would block the deal on antitrust objections, people involved in the deal said.

Write to Takashi Mochizuki at takashi.mochizuki@wsj.com, Kosaku Narioka at kosaku.narioka@wsj.com and Eun-Young Jeong at Eun-Young.Jeong@wsj.com

(END) Dow Jones Newswires

July 02, 2017 23:50 ET (03:50 GMT)