Here we go again.
After entertaining three bidders for its chip unit, Toshiba Corp. whittled that down to one preferred consortium back in June. It looked like a deal could be imminent.
Then Western Digital Corp. got litigious and Toshiba's board got cold feet, so the lead bidder, Bain Capital, was out and WD was back. Foxconn Technology Group, unusually quiet but ever determined, appears never to have given up.
Now, seven months after floating plans to spin off the memory-chip unit, all three suitors still have invitations to the engagement party and Toshiba is no closer to getting the cash it needs to plug a nuclear hole in its balance sheet.
Yes, Toshiba's equity is massively below water: a negative $4.5 billion at the end of June. But liabilities for its U.S. nuclear power plant foray are no longer a great unknown. (Most of the negative equity is due to retained losses of $4.7 billion.)
In June and July -- well after Toshiba started the ball rolling on the chip unit sale, and amid its legal battle with WD -- the Japanese company signed deals with Southern Co. and Scana Corp. to cap its nuclear power-plant obligations. The $5.85 billion liability isn't small, but it's now a known quantity, and more importantly it is to be spread out over 20 quarters.
If Toshiba sold the memory-chip unit for $18 billion and provisioned for its nuclear liabilities and negative equity, it would be left with $7.6 billion. There would be other outstanding debts, but what the company wouldn't have is the unit that brings in about one-third of revenue and operating income. It would also be left with a bucket of cash and nowhere to spend it.
So I'm now arguing that Toshiba should not sell its chip unit. This bunfight shows that Toshiba's chip assets are highly prized and the company shouldn't let them go. Instead, it should fund the liabilities another way.
First, it can turn to a portfolio of shares valued at around $3.1 billion. It can't liquidate all of those holdings, but even cashing in one-third would show debtors a willingness to optimize its balance sheet.
Then, given the renewed clarity over liabilities, Toshiba should leverage Japan Inc.'s desperation to keep the company in local hands by pushing for a debt refinancing. That might, and should, include commitments by Toshiba to tighten its belt, cut jobs and rein in spending.
Cutting capex in the chip industry, however, is a death sentence. Toshiba can ill afford to let up in the face of competition from Samsung Electronics Co. and SK Hynix Inc. But it could use some help from a very rich sugar daddy who wants what Toshiba can offer.
Enter Apple Inc.
Samsung is the world's largest maker of flash chips, and that must annoy the heck out of the folks in Cupertino. Toshiba could offer Apple a long-term supply deal in return for upfront cash. At the same time, Apple could help cover capex by buying some of the machinery Toshiba needs.
This is not a crazy idea -- Apple has done such equipment-consignment deals for more than 15 years. Be sure that the $34.8 billion in capex that Apple has spent in the past three years wasn't on its own factories (it outsources manufacturing) or that cool new spaceship campus.
Apple would benefit here by keeping that chip supply out of the hands of WD, which probably would seek to leverage the business to drive prices higher. And by retaining the chip unit, Toshiba would have the added bonus of removing the oxygen that fuels Western Digital's legal inferno.
By reconsidering the options, Toshiba may decide that strength comes from keeping all its limbs intact.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
The Bain consortium is reported to be offering 2.1 trillion yen ($19 billion), and Foxconn as much as 3 trillion yen.
I know, it's not as simple as "plugging a hole," but this is a math exercise as much as an accounting one.
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Paul Sillitoe at firstname.lastname@example.org