Photographer: Tomohiro Ohsumi/Bloomberg

Toshiba Chip Business Makes Hon Hai Willing to Pay $27 Billion

Toshiba Corp. and the Japanese government want to sell the company’s semiconductor business to a domestic buyer, but foreign bidders are proving more determined and aggressive as the auction heads toward a final decision in the coming weeks.

Taiwan’s Hon Hai Precision Industry Co., South Korea’s SK Hynix Inc. and chipmaker Broadcom Ltd. have all submitted preliminary bids for the Toshiba business valued at 2 trillion yen ($18 billion) or more, people familiar with the matter said. Hon Hai has indicated it may pay as much as 3 trillion yen, in part to force Japanese management into negotiations, said one of the people, asking not to be identified because the matter is private. Hynix is in talks with Japanese investors on a joint bid, in part to overcome political hurdles, the person said. 

Toshiba and government officials are planning to seek offers led by Japanese acquirers, though none has emerged yet, people familiar with the matter have said. The company could seek a bailout through what’s known as hougacho-hoshiki, or a form of community financing in which multiple domestic companies chip in a small amount of capital, one of the people said. Fujifilm Holdings Corp. may consider participating once it understands the investment framework, said spokesman Takao Aoki.

Toshiba is selling off assets as it grapples with billions of dollars in losses from its Westinghouse nuclear division. The Tokyo-based electronics conglomerate has more than 600 different businesses in everything from elevators to light bulbs, but its most valuable asset is the semiconductor business, which makes flash-memory chips used to store data in mobile phones and other devices. 

Yukihito Uchida, a Toshiba spokesman, declined to comment. Representatives for Hynix and Hon Hai declined to comment.  Broadcom didn’t immediately respond to requests for comment outside of normal business hours. An official at a government department overseeing Toshiba’s chip sale was not available for comment.

The Japanese government has made no secret of the fact that it wants to keep the business in the country, citing the strategic importance of chip manufacturing in future technologies. Chief Cabinet Secretary Yoshihide Suga has said flash memory chips are “extremely important” for Japan’s growth strategy.

So far though, foreign bidders appear more likely to land the operation. Hon Hai, led by Chairman Terry Gou, has proven particularly aggressive, much like it was when Gou faced down Japan government opposition to win control of Sharp Corp. last year. In that case, he also made an extremely high opening bid to pressure management into negotiations, only to later backtrack and reduce his offer. Gou still won the auction and has made progress in turning around Sharp.

Gou’s bid for Toshiba’s chip business faces stiff resistance in part because Hon Hai’s factories are located in China and he would likely move semiconductor manufacturing into the country, people familiar with the matter said. Japan is concerned Hon Hai would transfer Toshiba intellectual property to China, the people said. Hon Hai has talked with several parties about a joint bid, including with Korea’s Hynix, but all of the potential partners have resisted such a move to China, one person said.

Hynix is in negotiations with partners for a joint bid, including Japanese investors, and has said the Korean company won’t own more than 20 percent of the chips business, one person said. That’s aimed at helping Hynix win approval for its offer from Japanese authorities.

But Hynix hasn’t yet been able to organize a consortium to cover the full price of a 2 trillion yen bid, one of the people said. The South Korean company also may offer its partners an option to sell their equity to Hynix at a pre-determined price in the future, the person said. The conditions, aimed at reassuring other investors, may lead to resistance from Japanese officials who don’t want Hynix to have control over the chips unit, the person said.

Broadcom, which has considered joining with private equity investor Silver Lake on a bid, may instead make an offer on its own, people familiar with the matter said. Broadcom has emphasized it is a newcomer to the flash memory business so it won’t face the anti-trust scrutiny that Hynix will, the person said. Still Broadcom thinks it will gain synergies from combining Toshiba memory operations with its own chips business. 

Hedge fund Effissimo Capital Management Pte disclosed Friday it boosted its stake in Toshiba to 9.8 percent. The firm, set up by former colleagues of Japanese activist Yoshiaki Murakami, said last month it had become the company’s largest shareholder.

Toshiba is scheduled to report earnings for the December quarter by April 11. Another delay, which would be its third, could affect the Tokyo Stock Exchange’s review of its qualifications for staying listed.

The Japanese company put Westinghouse into Chapter 11 bankruptcy protection and said it may book a loss of as much as 1.01 trillion yen for the year that ended in March. The Tokyo-based company plans to choose a winner for the chips business by summer so it can close the deal by March of 2018, one executive said last month.

— With assistance by Sam Kim, Takako Taniguchi, Tsuyoshi Inajima, and Yuan Gao

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