Bain, KKR Said to Vie for Japan Support in Toshiba Chip Bids

KKR & Co. and Bain Capital LP are vying for support from Japan’s government in their efforts to acquire Toshiba Corp.’s semiconductor division as the Japanese company’s board meets Thursday to consider bids, according to people familiar with the situation.

The U.S. private equity firms are competing for the backing of two state-supported funds, Innovation Network Corp. of Japan and Development Bank of Japan, seen as essential in winning government approval for an acquisition, said the people, who asked not to be named because the matter is private. Western Digital Corp., which jointly owns certain chip assets with Toshiba, has also had discussions with both firms, the people said. Toshiba’s board is unlikely to make a final decision today, an executive said.

Nothing has been finalized in the alliances and the state-backed funds may choose which bid to support after Toshiba’s board picks a preferred acquirer, the people said. U.S. chipmaker Broadcom Ltd. is offering about 2.2 trillion yen ($20 billion) for the business, more than either of the PE firms, though price will not be the only factor in deciding a winner.

Time is running out for Toshiba to sell the chips unit and raise cash needed to stabilize its finances after a disastrous foray into the nuclear power business. The company needs to complete the sale by March 2018, the end of its fiscal year, or risk having its shares delisted from the Tokyo Stock Exchange.

Toshiba’s ability to meet that deadline has been jeopardized by clashes with Western Digital, which has objected to the chip unit auction and filed for an injunction to block the sale in California court. The Japanese company said it plans to proceed despite the legal action.

“We cannot comment as we have not yet received the complaint,” said Kaori Hiraki, a spokeswoman for Toshiba. “We are proceeding with selecting the preferred bidder by the second half of June, and will seek to close the definitive agreement by June 28.”

Toshiba shares rose 1 percent in Tokyo trading and have climbed 26 percent this month after tumbling earlier in the year. KKR and Bain declined to comment.

How a Bad Nuclear Bet Spurred a Battle for Chips: QuickTake Q&A

The bidding process is complicated by the conflicting goals among Toshiba, Western Digital and the Japanese government, which wants to keep the memory technology from foreign hands, especially in China. The chip unit is the world’s second-largest maker of flash memory chips, components that store data in everything from the iPhone to super computers.

As of a May 19 deadline for second-round offers, Broadcom and the KKR group had emerged as the two leading bidders, people familiar with the matter said at the time. Broadcom, based in San Jose, California, would face simpler regulatory reviews than some rivals because it’s not in the memory chip business now, said one of the people.

Western Digital Chief Executive Officer Steve Milligan traveled to Tokyo to present a revised offer and seek an alliance with the Japanese funds. Western Digital is planning to issue straight debt in an offer that would total 2 trillion yen, a person familiar with the matter has said, but Toshiba is skeptical of the bid because of its financing and conditions. Western, which is conceding it won’t be able to acquire the operation on its own, is seeking to influence the outcome and prevent the chip business from being sold to a competitor like Broadcom.

Marry Me, or I’ll Sue... A Western Digital True Romance: Gadfly

Western Digital filed for its injunction to block the sale Thursday morning in Tokyo, the day of Toshiba’s board meeting, requesting the auction be put on hold while it pursues arbitration claims against Toshiba. “Toshiba has no right to offer to transfer its joint venture interests to a third party and has no ability to enter into any transaction with a third party without obtaining our consent,” Western Digital said in a statement.

Separately, Milligan wrote a letter to Toshiba’s board explaining the court case. “Toshiba Corporation has blocked our efforts, and ignored and disrespected our contractual rights. In doing so, it has created unnecessary – and potentially catastrophic – risk of harm to Toshiba Corporation’s stakeholders,” he wrote.

Western Digital’s aggressive steps risk alienating the Japanese government as it seeks to rescue Toshiba, said one of the people familiar with the matter.

Deal of the Week: Toshiba Memory Chip Sale Hinges on Nationalism

Taiwan’s Hon Hai Precision Industry Co. has also submitted a bid for the chips unit, but Toshiba is reluctant to sell to the company because of its close ties to China. Founder Terry Gou has complained about the unfair process and vowed to press his case.

For potential chipmaker buyers, control of Toshiba’s output of memory chips is crucial in making any investment worthwhile. And investment firms need to guarantee they have enough capital available to continue to upgrade Toshiba’s plants and production in an industry where billions of dollars a year are needed to stay competitive.

— With assistance by Pavel Alpeyev, Takahiko Hyuga, and Yuji Nakamura

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE