Photographer: Kiyoshi Ota/Bloomberg

For Troubled Toshiba, Auditor Decision Is Key

Updated on
  • Deadline looms Thursday for submission of securities report
  • Short interest tumbles as investors bet auditor will sign off

For Toshiba Corp. investors -- a list that includes David Einhorn’s Greenlight Capital, Effissimo Capital Management and King Street Capital Management -- all eyes are on the struggling conglomerate’s auditor.

When Toshiba files its annual securities report on Thursday, PricewaterhouseCoopers Aarata’s endorsement may help save the company from delisting. The filing is the latest milestone event for the Japanese company, which has been on a watchlist for possible expulsion from the Tokyo Stock Exchange since September 2015 after it overstated profit to cover up multi-billion dollar losses in its nuclear business.

Bulls have been in the ascendancy as hedge funds digest local media reports on whether PwC will give its blessing, with Nikkan Kogyo and the Nikkei newspaper reporting this week that it would. Toshiba’s stock surged 13 percent over the three days through Wednesday, while short interest tumbled to the lowest since March.

“I don’t think they’ll be delisted,” said Mark Newman, a senior analyst at Bernstein Research in Hong Kong. “It’s such an important company for Japan. The stock exchange will try to keep them listed.”

King Street, a $19 billion money manager that focuses on distressed companies, has amassed 5.8 percent of the company’s shares, becoming the fourth-largest holder, according to data compiled by Bloomberg. The New York-based investor joins Einhorn’s Greenlight, which took a stake in Toshiba in the second quarter, and Singapore-based Effissimo, the largest shareholder.

These moves coincide with an increasingly widespread belief that the TSE will avoid delisting one of Japan’s most iconic companies, at least for now. The stock exchange has plenty of leeway about whether and when to throw out a company.

If PwC issues a qualified endorsement, as predicted by the Nikkei, the bourse has no set rules for how to respond. Even in the worst-case scenario, an adverse opinion, the TSE will only delist if it considers it necessary to keep order in the market. That decision, says Japan Exchange Group Inc. spokeswoman Mika Aonuma, is entirely at the bourse’s discretion.

“The exchange will decide on a case-by-case basis,” Aonuma said by phone. “It’s difficult to give a uniform answer.”

Greenlight declined to comment, while Effissimo and King Street didn’t respond to requests for comment.

Seth Fischer, chief investment officer of Hong Kong-based hedge fund Oasis Management, said Monday after the Nikkan Kogyo report that the chances are Toshiba will remain listed.

Of course, Toshiba’s troubles don’t end with auditor signoff. It could still be delisted after the exchange’s self-regulatory organization reviews whether the company has improved its internal controls. The auditor may issue a qualified endorsement of Toshiba’s financials while giving an adverse opinion on internal controls, Reuters reported late Tuesday, which was echoed by a new Nikkei report on Thursday.

“Toshiba was supposed to have fixed internal controls by mid-March,” said Travis Lundy, an analyst who publishes at Smartkarma. “An adverse statement would indicate it wasn’t fixed by end-March. The SRO’s conclusions would surely take into consideration that point.”

The company could also be delisted if it has negative net worth for a second fiscal year in the period ending March 2018. Toshiba has been trying to sell its prized chip business to avoid such a scenario, a move that joint venture partner Western Digital Corp. has been attempting to block.

“Things haven’t changed,” said Masahiko Ishino, an analyst at Tokai Tokyo Securities Co. who suspended coverage of the stock in June and has no plans to resume it. Whether the company will remain listed remains “unclear,” he said.

Toshiba said Wednesday that it will file its annual and first-quarter securities reports today, but that it hadn’t received the auditor’s review of its earnings and wasn’t the source of local press reports. A spokesperson for PwC in Tokyo said the company will make a decision based on audit standards. Still, if the articles are right, Einhorn, Effissimo and other long investors may have reason to celebrate.

“I suspect the risk is declining,” Nicholas Benes, the Tokyo-based head of the Board Director Training Institute of Japan, said about delisting. “The stock price is up recently, and at this point Toshiba knows it is at the ‘last chance’ juncture, so must come to an agreement with its auditors.”

— With assistance by Sarah McDonald, and Lily Nonomiya

(Updates with latest Nikkei report on adverse internal control opinion in 11th paragraph.)
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