By Dana Mattioli and Dana Cimilluca
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (September 14, 2017).
A group including Apple Inc. and Dell Technologies Inc. surged
to the front of a hotly contested race to acquire Toshiba Corp.'s
memory-chip business, a crucial supplier to some of the world's
biggest makers of electronic gear.
Toshiba said Wednesday it had signed a nonbinding agreement with
the leader of the group, private-equity firm Bain Capital, and
intends to reach a deal by the end of September. The bid values the
business at about $19 billion, according to people familiar with
the matter.
The development is the latest twist in a global auction that has
pitted three major bidders against each other and exposed a rift
between Toshiba and a key partner, Western Digital Corp., which is
also vying for the business. At stake is control over a key
building block in everything from smartphones to heavy-duty
computing machines.
Toshiba is racing to strike a deal in the wake of huge losses at
its U.S. nuclear unit, Westinghouse Electric Co., which filed for
bankruptcy earlier this year. The Tokyo company has said it needs
to sell the profitable memory unit to bring its shareholder equity
back into positive territory by the end of its fiscal year in March
2018. Otherwise, its shares would face delisting under Tokyo Stock
Exchange rules.
Besides Apple and Dell, the Bain group includes disk-drive maker
Seagate Technology PLC and others, and more tech and financial
players may join, according to people familiar with the matter. It
also includes South Korean chip maker SK Hynix Inc., as well as
Innovation Network Corp. of Japan, a fund backed by the Japanese
government, and government-owned Development Bank of Japan, other
people said.
The scrum highlights the strategic importance of the Toshiba
business, which makes NAND flash memory chips used for data storage
in smartphones, computers and other electronics.
Apple and Dell, which would likely supply debt financing for a
Bain bid, want to ensure the Toshiba unit remains a viable
supplier, according to people familiar with the matter. The tech
heavyweights also want the unit to stay competitive with Samsung
Electronics Co., the leader in flash memory chips and a major rival
to Apple.
"This shows the dire situation that the flash memory industry is
in with high prices and low availability over an extended period of
time," said Patrick Moorhead, president of Moor Insights &
Strategy. "Companies need this storage to ship and sell products at
a profit."
The Bain consortium's plan would be to take the chip business
private as an independent entity and bring it public again at a
later date in Japan, one person said.
It is far from clear that a resolution to the monthslong saga is
at hand. A number of constituents with disparate interests have to
agree before a deal can be completed, and a host of regulators
would have to sign off. In June, Toshiba selected a group including
Bain and SK Hynix as the preferred bidder before those talks
stalled. Toshiba, which said Wednesday that Bain had made a new
offer, added in its statement that the memorandum doesn't preclude
talks with other bidding groups.
At various points in the negotiations, Toshiba has leaned toward
another bidding group that includes Western Digital, a U.S. maker
of hard-disk drives that is the Japanese company's partner in the
memory-chip business. But the parties haven't been able to agree on
how much influence Western Digital would have following a deal.
They are now openly at odds, with Western Digital insisting it
has veto rights over any sale and Toshiba saying that isn't true.
The two sides are headed for international arbitration.
A spokeswoman for Western Digital, which has joined buyout giant
KKR & Co. on a bid, said the company is "disappointed" by
Toshiba's move and still wants to reach a deal.
Meanwhile, the Japanese government has raised objections to
another bid led by Foxconn, formally known as Hon Hai Precision
Industry Co., because of the company's extensive operations in
China. Some government officials believe Foxconn's China ties could
result in Japanese technology leaking to that country.
Given how the deal has captivated Wall Street, some of those
working on it have taken to calling it privately the "RJR Nabisco
of tech" -- a reference to the 1980s-era leveraged buyout
memorialized in the book "Barbarians at the Gate."
Toshiba's flash-memory chips are used not just in smartphones
but also in servers for cloud services, internet-connected devices
and other products, demand for which is on the rise. Whether
Toshiba sells the unit to one of the three bidder groups or decides
not to sell after all -- still a significant possibility -- that
robust demand is the backdrop for the spirited sales process.
In Toshiba's results for the April-June quarter, sales for the
segment that includes memory chips rose 23% and operating profit
for that segment was greater than the company's total operating
profit.
About 30% of the NAND supply in the new iPhones Apple unveiled
this week comes from Toshiba -- with 30% from Western Digital, 25%
from SK Hynix and the rest from Samsung and Micron Technology,
Inc., according to estimates by Susquehanna International Group. A
Western Digital acquisition of Toshiba could give the U.S. company
increased leverage at a time when NAND prices are already rising,
some customers worry.
The tech industry is at peak anxiety when it comes to flash
memory, said Mr. Moorhead of Moor Insights. He added that a Toshiba
deal would allow Apple and Dell, two of the world's largest
purchasers of flash memory, to guarantee supply at a lower
cost.
Regardless of which party Toshiba chooses, antitrust clearance
is likely to be a hurdle because getting approval in major markets
can take more than six months. That could make it difficult for a
deal to close by March 2018, although a bidder might look for ways
to get money into Toshiba's hands before closing.
--Tripp Mickle and Rachael King contributed to this article.
Write to Dana Mattioli at dana.mattioli@wsj.com and Dana
Cimilluca at dana.cimilluca@wsj.com
(END) Dow Jones Newswires
September 14, 2017 15:40 ET (19:40 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.