Toshiba's plans for chip sale hit snag as Western Digital objects

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.
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.PHOTO: EPA

SAN FRANCISCO/TOKYO (BLOOMBERG) - Toshiba's plans to sell its memory chip business to raise much-need 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 per cent in Tokyo trading. They have dropped 22 per cent this year before today.

The US company, one of the largest makers of computer hard drives, last year made a US$15.8 billion (S$22.06 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 January, Western Digital said it had cash and cash equivalents of US$5.2 billion. The company had "liquidity available" totaling US$6.2 billion and a net debt position of about US$800 million, it said.

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 has indicated it's willingness to pay as much as 3 trillion yen (S$38.47 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 US$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, a company that has led the wave of consolidation in the chip industry over the last two years.