Toshiba's Trash, Someone Else's Treasure
Toshiba Corp. forgot to add its cardboard box of bits and bobs to the corporate garage sale.
The flailing Japanese group is in the process of selling its prized chips business for $20 billion in badly needed funds, having already hived off a medical device unit and nuclear power. And it continues to consider selling or taking public the Swiss maker of electricity meters it bought in 2011, before getting mired in accounting scandals and billions of dollars in write-downs from a nuclear business gone awry.
As long as it's cleaning house, why is Toshiba still holding on to shares in a hodgepodge of 37 companies, involved in everything from vacuum cleaners to airport souvenir shops, with a combined market value of $3.3 billion? It should get rid of these, too.
Selling off assets for one-time gains is generally a short-sighted way to run a business. But the reality is, Toshiba needs the cash to remain a going concern. It will be better off if it drives the sales process from the outset, providing a chance to sell off its stakes at a premium instead of caving to activist investors who are already circling the weakened, cash-rich companies. And it certainly doesn't need those distractions.
Toshiba is expecting a loss of 995.2 billion yen ($8.9 billion) and negative shareholders’ equity of 581.6 billion yen for the year through March. It will lose its blue-chip status when it gets demoted to the second section of the Tokyo Stock Exchange and could be delisted altogether if its shareholder equity stays negative, a likely fate if it doesn't close its semiconductor deal by the end of the first quarter next year.
Selling off holdings in non-core assets would also unshackle the 37 publicly listed companies that no longer benefit from what was once a strong parent company. It's not like the brand name "Toshiba" stokes goodwill these days.
Take Toshiba Plant Systems & Services Corp., which constructs power plants and public works projects. Toshiba Corp. owns 49.73 percent of the company and accounts for nearly half of Toshiba Plant's revenue. That cozy relationship looks partly to blame for Toshiba Plant's lagging cash conversion cycle, a metric used to judge how well a company manages its money.
It takes Toshiba Plant 50 percent longer than competitors to collect payment for its services. By cutting the cord from the parent, it could continue providing services on terms dictated by the market, rather than relationships.
Another example is Toshiba TEC, a maker of payment technology and copy machines that is half owned by Toshiba Corp. The unit's cash balance of 46.1 billion yen amounts to 32 percent of enterprise value, suggesting that freed of ties to the parent, the unit could return that cash to shareholders. Its 0.34 percent 12-month dividend yield pales in comparison to the industry average of 1.67 percent.
There are challenges to a sale of Toshiba Corp. odds and sods.
For one, it would have to agree to sell shares in companies that probably have served as ready sources of funds. 1 A number of them are thinly traded, making it harder to unload large chunks of shares at reasonable prices. And while firms like Toshiba Plant Systems likely have enough cash to buy back their shares, others might have to partner with private equity or find other financing to acquire the shares.
But getting rid of ties to Toshiba could help transform them into better companies and unlock hidden value for investors. And by controlling the process, the parent might get a better price for its cast-offs. As Japan's decluttering guru Marie Kondo teaches, less is always more when cleaning up a mess.
Hong Kong-based hedge fund Oasis Management went to court to get Toshiba Plant to take back 87.8 billion yen ($806 million) that was kept at Toshiba. Toshiba has also pledged stakes in many of these units as collateral against other financial obligations.
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