Toshiba Chip Sale Hits Snag as Western Digital Objects

  • Toshiba executives believe objections are not barrier to deal
  • U.S. company may not be able to match some of higher bids

Toshiba said to Narrow Chips Bids to Four Companies

Toshiba Corp.’s plans to sell its memory chip business to raise much-needed cash hit a snag as joint-venture partner Western Digital Corp. said the sale may violate the companies’ contract.

Western Digital Chief Executive Officer Steve Milligan wrote a letter to Toshiba’s board members on April 9 advising them that they should negotiate exclusively with his company before any sale. He also argued that the rumored bidders were unsuitable and the reported prices offered were above the fair and supportable value of the chip business, according to a person familiar with the process. Toshiba and Western Digital are joint owners of certain chip business facilities.

Western Digital’s contentions may add another potential roadblock to the troubled process of finding a buyer for Toshiba’s chip unit. The Japanese company needs cash to help shore up finances hurt by losses from its Westinghouse nuclear business and has warned that its very survival is at risk. Analysts cautioned that Western Digital does have legal rights that will bear on the sale process.

“We believe that WDC has rights surrounding the JV including the consent to approve/disapprove of any transaction involving the joint venture,” Amit Daryanani, an analyst at RBC Capital Markets, wrote in a research note. “We believe that WDC has the legal wherewithal to veto or approve a winning bid.”

Toshiba disagrees with Western Digital’s assertion that a sale would violate the agreement between the two companies, Toshiba executives said when contacted by Bloomberg News.

Toshiba shares fell as much as 3.1 percent in Tokyo trading. They have dropped 22 percent this year before today.

The U.S. company, one of the largest makers of computer hard drives, last year made a $15.8 billion bet on technology that’s making its core business obsolete, with its purchase of SanDisk Corp. SanDisk was a manufacturing partner of Toshiba, a role that Western Digital has assumed.

That purchase piled debt onto its balance sheet and may restrict its ability to match some of the bids that other company’s have reportedly made for Toshiba’s chip unit. In December, Western Digital said it had net debt of $8.9 billion. The company had “liquidity available” totaling about $6.2 billion, it said in January.

Toshiba is in the midst of an auction for the chips business and has narrowed the original group of contenders after a first round of bidding. Taiwan’s Hon Hai Precision Industry Co. has indicated it’s willingness to pay as much as 3 trillion yen ($27 billion) for the business, Bloomberg has reported.

Toshiba’s board is trying to balance the need for a quick sale with concerns that such a deal would mark the end of Japan’s chance of restoring its once-leading role in the $300 billion chip industry and potentially aid China’s push to enter that important market, Bloomberg News has reported.

Milligan’s letter, which was earlier reported by the Nikkei Asian Review, cautioned in particular against accepting a bid from Broadcom Ltd., a company that has led the wave of consolidation in the chip industry over the last two years.

(Corrects Western Digital’s debt number in eighth paragraph in story published April 12.)
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