Apple, Dell Join Bid For Toshiba Chip Unit -- WSJ

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (September 14, 2017).

A group including Apple Inc. and Dell Technologies Inc. surged to the front of a hotly contested race to acquire Toshiba Corp.'s memory-chip business, a crucial supplier to some of the world's biggest makers of electronic gear.

Toshiba said Wednesday it had signed a nonbinding agreement with the leader of the group, private-equity firm Bain Capital, and intends to reach a deal by the end of September. The bid values the business at about $19 billion, according to people familiar with the matter.

The development is the latest twist in a global auction that has pitted three major bidders against each other and exposed a rift between Toshiba and a key partner, Western Digital Corp., which is also vying for the business. At stake is control over a key building block in everything from smartphones to heavy-duty computing machines.

Toshiba is racing to strike a deal in the wake of huge losses at its U.S. nuclear unit, Westinghouse Electric Co., which filed for bankruptcy earlier this year. The Tokyo company has said it needs to sell the profitable memory unit to bring its shareholder equity back into positive territory by the end of its fiscal year in March 2018. Otherwise, its shares would face delisting under Tokyo Stock Exchange rules.

Besides Apple and Dell, the Bain group includes disk-drive maker Seagate Technology PLC and others, and more tech and financial players may join, according to people familiar with the matter. It also includes South Korean chip maker SK Hynix Inc., as well as Innovation Network Corp. of Japan, a fund backed by the Japanese government, and government-owned Development Bank of Japan, other people said.

The scrum highlights the strategic importance of the Toshiba business, which makes NAND flash memory chips used for data storage in smartphones, computers and other electronics.

Apple and Dell, which would likely supply debt financing for a Bain bid, want to ensure the Toshiba unit remains a viable supplier, according to people familiar with the matter. The tech heavyweights also want the unit to stay competitive with Samsung Electronics Co., the leader in flash memory chips and a major rival to Apple.

"This shows the dire situation that the flash memory industry is in with high prices and low availability over an extended period of time," said Patrick Moorhead, president of Moor Insights & Strategy. "Companies need this storage to ship and sell products at a profit."

The Bain consortium's plan would be to take the chip business private as an independent entity and bring it public again at a later date in Japan, one person said.

It is far from clear that a resolution to the monthslong saga is at hand. A number of constituents with disparate interests have to agree before a deal can be completed, and a host of regulators would have to sign off. In June, Toshiba selected a group including Bain and SK Hynix as the preferred bidder before those talks stalled. Toshiba, which said Wednesday that Bain had made a new offer, added in its statement that the memorandum doesn't preclude talks with other bidding groups.

At various points in the negotiations, Toshiba has leaned toward another bidding group that includes Western Digital, a U.S. maker of hard-disk drives that is the Japanese company's partner in the memory-chip business. But the parties haven't been able to agree on how much influence Western Digital would have following a deal.

They are now openly at odds, with Western Digital insisting it has veto rights over any sale and Toshiba saying that isn't true. The two sides are headed for international arbitration.

A spokeswoman for Western Digital, which has joined buyout giant KKR & Co. on a bid, said the company is "disappointed" by Toshiba's move and still wants to reach a deal.

Meanwhile, the Japanese government has raised objections to another bid led by Foxconn, formally known as Hon Hai Precision Industry Co., because of the company's extensive operations in China. Some government officials believe Foxconn's China ties could result in Japanese technology leaking to that country.

Given how the deal has captivated Wall Street, some of those working on it have taken to calling it privately the "RJR Nabisco of tech" -- a reference to the 1980s-era leveraged buyout memorialized in the book "Barbarians at the Gate."

Toshiba's flash-memory chips are used not just in smartphones but also in servers for cloud services, internet-connected devices and other products, demand for which is on the rise. Whether Toshiba sells the unit to one of the three bidder groups or decides not to sell after all -- still a significant possibility -- that robust demand is the backdrop for the spirited sales process.

In Toshiba's results for the April-June quarter, sales for the segment that includes memory chips rose 23% and operating profit for that segment was greater than the company's total operating profit.

About 30% of the NAND supply in the new iPhones Apple unveiled this week comes from Toshiba -- with 30% from Western Digital, 25% from SK Hynix and the rest from Samsung and Micron Technology, Inc., according to estimates by Susquehanna International Group. A Western Digital acquisition of Toshiba could give the U.S. company increased leverage at a time when NAND prices are already rising, some customers worry.

The tech industry is at peak anxiety when it comes to flash memory, said Mr. Moorhead of Moor Insights. He added that a Toshiba deal would allow Apple and Dell, two of the world's largest purchasers of flash memory, to guarantee supply at a lower cost.

Regardless of which party Toshiba chooses, antitrust clearance is likely to be a hurdle because getting approval in major markets can take more than six months. That could make it difficult for a deal to close by March 2018, although a bidder might look for ways to get money into Toshiba's hands before closing.

--Tripp Mickle and Rachael King contributed to this article.

Write to Dana Mattioli at dana.mattioli@wsj.com and Dana Cimilluca at dana.cimilluca@wsj.com

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September 14, 2017 15:40 ET (19:40 GMT)