Toshiba 2017 Annual Review: Big Deals Are Ahead
Where Toshiba Downtrend Occurred
Earlier this year, in February, Toshiba’s Chairman Shigenori Shiga was reported to resign in the course of $6.3 billion loss. Toshiba faced hard times in American nuclear power industry. The trouble stemmed from the executives’ flawed strategic decisions over business cost overrun form its decade-long U.S. stakes.
The story roots back to 2006 when Toshiba acquired Westinghouse for $5.4 billion. For the time the deal seemed favorable for Toshiba, as U.S. Government also provided guarantees. Later however stricter policy standards were proposed in Japan following 2011 Fukushima nuclear accidents. In addition, natural gas still maintained its attractive positions in the power generation, which resulted in hard times for Westinghouse.
Westinghouse had been designing new-era reactors AP1000 and planned to market them with 45 targeted units worldwide by 2030. Its technology forms the basis of about half the world’s atomic units. Bloomberg reported Toshiba’s loss could go beyond the expectations and hit record high of $9.1 billion if Westinghouse went through bankruptcy or turned to a sponsor for reorganization. Currently Toshiba will be forced to downsize the number of reactors under development.
On the other hand, servicing nuclear plants comprises almost 80% of the company’s performance and provides better returns for the company than building up new plants, Mr. Tsunakawa, the president of Toshiba said.
Toshiba’s Market Share
The rumors on the loss went into light in December 2016, which affected Toshiba’s market value to drop. First worrying signs alerted the markets when Toshiba twice delayed its P/L report for December quarter to be published in April. The vows of “too big to fail” and the expectations that Japanese government will give a helping hand to support the company didn’t let the company’s shares drop over 23% in the market.
In June, 2017 Toshiba faced the threat to be delisted or to be demoted from the first to the second section of the Tokyo Stock Exchange. It assumed passive index trackers would soon start selling off its stock. An estimated loss of $8.9 billion for the year ended March 31 could show negative equity in its statement of financial position. Thus, the company’s delisting would take place by default if its equity balance remained negative for two years in row. To prevent things getting worse, Toshiba appealed to the state financial authorities to get approval for another delay of its full year financial statements. Its auditor, PwC, would finalize the Westinghouse filings by mid-August. Analysts forecasted TSE’s removal from Nikkei 225 Average could shrink the company’s market value downwards by $1.2 billion, as passive funds would also adjust and withdraw investments.
Finally, this August Toshiba received “qualified opinion” from its auditing company PriceWaterhouseCoopers Aarata (PwC). It was a sign of approval to avoid delisting and Toshiba stock price again took elevation trend in the market. The auditor’s opinion was positive both for the year ended March, as well as for April-June, 2017. However, there was also a note by PwC highlighting that Toshiba failed to record losses generated from Westinghouse in a timely manner. It assumed that some of the losses happened earlier in the financial year to March 2016. However, the scenario to record them in a single business year was a saving boat for Toshiba in order to prevent delisting from the Tokyo Stock Exchange. If Toshiba had recorded the loss and negative book value of its net assets for 2 consecutive years, then delisting would be inevitable.
140-year old firm is now hopeful to gain back its shareholders trust to raise more cash after 2015 unfavorable year. It has already sold off its medical devices unit to offset a part of the loss. Is it high turn for flash memory chip now?
How Soon Can It Recover?
The issue Company currently faces is whether to sell its Chips unit in pursue of better liquidity indicators. Also, it should withstand market competitors hungry to get their feet into memory chip business. The chips unit is recording significant progress now and generating times more profit compared to the previous year. For April-June it provided 94% of the company’s operating profit.
In April, Taiwan’s Hon Hai placed an offer of 3tn yen ($27 billion) for Toshiba’s chip unit. However, the bid faced resistance because of its ties to China and risks the deal would bear. As a result, Toshiba would be more willing to enter into more predictable and stable negotiations and consider lower bids.
In the meantime, Toshiba’s U.S. partner Western Digital Corp. won’t agree on the auctioned sale of Toshiba’s chip business. It already initiated legal action to prevent any deal that does not have its consent.
The situation seems to narrow down the potential selection list of bidders. Time does not wait and Toshiba has only several months to finalize the deal before March 2018. Provided the regulatory proceedings of the sale deal can take several months to go, analysts agreed the Company should reach agreements within weeks from now.
Latest Bids for Toshiba Chips Business
In late August, 2017 a new player landed in NAND market. Apple joined the consortium of business led by the investment company Bain Capital in revised $18.4bn (2tn yen) bid for Toshiba’s chip business. The success of this bid can ensure iPhone maker to obtain memory chips for smartphones. Hence, iPhone will outweigh its main market competitor Samsung. And here Toshiba as the world’s second-largest producer of memory chips for smartphones and computers, could have the right business unit for sale at the moment. While the negotiations between Toshiba and Western Digital don’t run very smoothly, Apple is in a hurry to close the deal.
Alternatively, a unified Toshiba and Western Digital business could boost their stronger position in the market and create more dependency for iPhone from its main rival Samsung. Apple has always stood for healthy competition to be able to multisource. As long as there are many suppliers in the market, the prices for chips remain competitive. The bid to Toshiba plans to structure the shares so that both Bain and Toshiba possess 46% of the unit ownership.
Bain Capital welcomed Japanese government to close the deal only after legal risks with Western Digital are settled. Western Digital is still on its way to raise its previous bid of 1.9tn yen up to 2tn yen.