Toshiba's Radioactive M&A Blunder
Plenty of M&A deals have destroyed value for the acquirer's investors but few have done so quite as quickly, or egregiously, as Westinghouse Electric’s purchase of CB&I Stone & Webster Inc., a U.S. nuclear construction business.
On Tuesday, Westinghouse’s parent company Toshiba Corp. said a reassessment of the $229 million deal, announced barely a year ago, might oblige it to take a charge of several billion dollars. That's billion with a "b".
Not for the first time, the Japanese conglomerate appears to have badly underestimated the risks of expanding its footprint in the nuclear industry.
It’s a complicated tale involving a legal dispute with its former construction partner over working capital adjustments, cost overruns and the value of the goodwill therefore created in the CB&I transaction. But for Toshiba investors still reeling from the company’s massive accounting scandal, the lesson is fairly simple: Beware of handing it yet more money to throw after bad.
A writedown of more than 363 billion yen ($3.1 billion) -- the actual amount isn't yet clear -- would wipe out Toshiba’s shareholder equity, so a capital increase is quite likely. However, before asking investors to stump up more cash, Toshiba's management should first take a hard look at the company’s nuclear strategy (That appears to be the case: Toshiba President Satoshi Tsunakawa said at a briefing in Tokyo on Tuesday may reconsider the role of its nuclear business in the future.)
Toshiba overpaid when acquiring Westinghouse for $5.4 billion in 2006 and the business faces competition from French, Russian and Chinese players. Its U.S. and Chinese nuclear projects have suffered long delays.
In its latest fiscal year ended in March, Toshiba wrote down the value of Westinghouse by 260 billion yen, contributing to the company's total loss of 460 billion yen during the period.
While Toshiba is still aiming for 45 nuclear reactor orders by 2030, it’s not unreasonable to wonder whether the company would be better off focusing more on semiconductors, its other core business.
More broadly, investors should consider whether they're really comfortable with exposure to the risks of building a new generation of large nuclear power stations.
In theory, nuclear is a decent solution to the huge problem posed by global warming because unlike burning coal, splitting atoms doesn’t emit huge amounts of carbon dioxide. Countries like India and China are likely to build plenty of reactors.
But even if you accept nuclear has a role to play -- something other countries started to question in the wake of the Fukushima nuclear accident and as costs have fallen for solar and wind power – it’s not clear listed companies will be up to the task.
French group Areva SA has lost almost 10 billion euros ($10.5 billion) since 2011, due in part to delays building a new reactor design at sites in France and Finland. Listed but state-controlled Electricite de France SA is purchasing the troubled Areva nuclear reactor unit but now faces balance sheet difficulties of its own.
EDF is preparing to sell 4 billion euros of new shares to help fund its 12 billion-pound ($14.7 billion) share of the Hinkley nuclear project in the U.K.
Although in theory Hinkley could deliver bumper returns for EDF, the risks of it becoming yet another nuclear white elephant seem high. Toshiba’s M&A blunder seems like yet another poor omen.
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