March 8 (Bloomberg) -- Hitachi Ltd., Japan’s second-largest manufacturer by revenue, climbed to a two-year high in Tokyo trading after agreeing to sell its hard-disk drive unit to Western Digital Corp. for about $4.3 billion.
The shares advanced 1.8 percent to 514 yen, the highest close since November 2008. The Japanese industrial group plans to sell Hitachi Global Storage Technologies for about $3.5 billion in cash and 25 million shares of Western Digital, the companies said yesterday.
The sale would be Hitachi’s biggest asset disposal ever as the company, saddled with more than 850 units, seeks to focus on making power plants, trains and other infrastructure. For Western Digital, the purchase would help it vault atop the shrinking market for hard drives, which are facing mounting competition from faster and smaller flash drives that store data in products such as Apple Inc.’s MacBook Air and iPhones.
“Western Digital needed to strengthen its operations amid intensifying competition and Hitachi has been considering selling the volatile hard-disk drive business,” said Yuichi Ishida, a Tokyo-based analyst at Mizuho Investors Securities Co. “The two companies probably struck the deal at the right time when both sides needed to make a move.”
Western Digital surged 16 percent yesterday, the biggest gain in more than two years, while its nearest competitor, Seagate Technology Plc, jumped 9 percent on the Nasdaq Stock Market, in the biggest gain since October.
The offer values Hitachi’s hard-disk drive business at 3.4 times its book value as of December. By comparison, Seagate trades at 2.2 times book value and Western Digital changes hands at a multiple of 1.6.
The offer amounts to about 90 percent of the unit’s annual sales. That compares with a median price of 95 percent paid for other companies in the industry, according to Bloomberg data dating back to the last five years.
Seagate will benefit from the acquisition as computer makers, which use the disk drives to store data, move away from Western Digital to diversify their storage suppliers, said Matt Bryson, an analyst at Avian Securities LLC in Boston, who rates shares of Western Digital “positive.”
Last year, Western Digital tried to buy Seagate, and the offer was refused on concern the deal would have faced antitrust obstacles, two people familiar with the matter said in December. Dublin-based Seagate also spurned an offer from TPG Capital.
The Hitachi unit allows Western Digital to challenge Seagate for the more lucrative enterprise customers, which will result in increased competition, said Aaron Rakers, an analyst for Stifel Nicolaus & Co. in St. Louis.
Western Digital’s “strength is different from Hitachi,” Hitachi President Hiroaki Nakanishi said in a press conference yesterday. Hitachi will bring a stronger lineup for enterprise customers, he said.
“The industry isn’t a growth industry,” said Rakers, who recommends buying Western Digital shares. “Consolidation isn’t a technology move, it’s oftentimes a must for the industry.”
Hitachi, which has posted four consecutive annual losses, had considered breaking off the hard-drive business in an initial public offering last year. The Japanese company will own about 10 percent of Irvine, California-based Western Digital after the deal, scheduled for completion in September, and will gain two seats on the board.
The transaction will also make Hitachi the largest shareholder of Western Digital, according to Nakanishi. The Japanese company will reinvest money from the sale into its remaining businesses, he said.
Hitachi paid $2.05 billion to purchase the data storage business from International Business Machines Corp. to start the unit in 2003. The unit posted five consecutive annual operating losses before it turned profitable in 2008, according to Hitachi.
Western Digital and Hitachi accounted for 50 percent of the number of hard-disk drives shipped worldwide during the fourth quarter, according to estimates at research firm IHS ISuppli. That’s almost double Seagate’s share.
The purchase will also allow Western Digital to expand in the enterprise hard-disk drive segment, Fang Zhang, a storage systems analyst at IHS ISuppli, said in an e-mail.
“The enterprise HDD market garners significantly higher margins than the consumer segment, which makes the enterprise a fast-growing market for HDD revenue,” Zhang said.
Hard-disk drive shipments will probably drop about 4 percent this quarter from the fourth quarter amid competition from smaller and faster storage products, according to IHS ISuppli. Samsung Electronics Co. and Toshiba Corp. are the biggest makers of so-called flash memory chips that are displacing hard-disk drives in consumer electronics and tablets.
Western Digital said it plans to raise about $2.5 billion of debt to help fund the purchase. The company had about $231 million of long-term debt at the end of last year. The extra debt may cause the company’s credit rating to be cut by two levels, according to Bloomberg’s company credit model.