Spitting Chips

The company won't start looking cheap until its accounting problems are firmly in the past.

"Inside every bad company is a good company struggling to get out" is a dictum that's kept M&A bankers and private equity shops in business for decades. Masashi Muromachi must be hoping it applies to Toshiba.

The president of the power stations-to-PCs business is looking to spin off loss-making divisions and cut jobs as Toshiba struggles to survive an accounting scandal, writedowns and reduced earnings forecasts that have caused its stock to slump 50 percent this year. The company expects a record 550 billion yen ($4.5 billion) loss in the current fiscal year, it said today.

You might think Muromachi's diamond in the rough is Toshiba's semiconductor business. It's a major player in flash memory, the chips that are increasingly popular as fast, energy-efficient storage in phones, tablets and laptops. Compared with its other business lines, the chip unit -- part of a division called 'electronic devices and components', in contrast to the 'lifestyle' arm that sells the Toshiba-branded electronics you'll find around the house -- is a stand-out success:

Best of the Bunch

Toshiba operating return on assets, by division

Source: Company reports; Bloomberg data

If Toshiba could dispose of its consumer electronics unit and spin the marginally profitable power and real estate businesses into something like a Western-style infrastructure fund, it could start to resemble a rather attractive chipmaker, with sidelines in medical devices and elevators and air conditioners, courtesy of the 'community' division. With some 1.68 trillion yen of revenue in the year through April, the semiconductor arm as a standalone company would be a top-10 global chipmaker, data compiled by Bloomberg show.

What would such a business be worth?  Its operating income over the most recent four quarters came to 136 billion yen. Allot it a slice of the group's debt in proportion to the division's 21 percent share of assets -- about 245 million yen -- and value it in line with the 12.8 times multiple for other semiconductor makers with more than $5 billion in sales, and there's probably about 1.74 trillion yen of enterprise value.

That's a best-case scenario. The unit's operating margin of 12.9 percent would put it in the bottom third of that group of chipmakers, and it's probably heroic to assume Toshiba could dispose of its home electronics and power businesses without holding onto a disproportionate share of the associated debt.

Cheap as Chips

Operating margin of major semiconductor producers

Source: Bloomberg data

Note: Toshiba numbers are for electronic devices & components unit

Is that a bargain? Sometimes when you do this sort of analysis, you find the good business is probably worth more than the company as a whole. British corporate raider James Hanson got Imperial Tobacco's core business for almost nothing after taking it over in 1985 and selling off brewing, snacks and food-wholesale divisions. Yahoo is arguably worth less than the sum of its stakes in Alibaba, Yahoo Japan, and its cash holdings.

The same isn't true of Toshiba, however. Remove a 1.74-trillion yen chips business and value consumer electronics at nothing, and you still have another 934 billion yen in enterprise value for a group of companies that made about 13.7 billion yen of operating losses over the last 12 months. It's possible once the current run of writedowns and impairments are finished, those assets will look more attractive, but until the accounting issues are resolved it doesn't look like there's buried treasure here. If Toshiba's chips business is a diamond in the rough, it's probably the sort you'd find on a drill-bit, rather than an engagement ring.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    David Fickling in Sydney at dfickling@bloomberg.net

    To contact the editor responsible for this story:
    Katrina Nicholas at knicholas2@bloomberg.net

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