Western Digital Says It Matched Rivals’ Bids for Toshiba Chip Unit

Western Digital Corp said it matched rival bidders’ offers to acquire Japanese conglomerate Toshiba Corp’s flash memory unit ahead of a court hearing on Friday over whether to halt the auction process.

Western Digital, in court documents filed July 7, said it has made six proposals since February, including a proposal on June 27 matching the best offer. On June 21, Toshiba said its preferred bidder was a consortium of Bain Capital and Japanese government investors offering $18 billion.

Since February, Toshiba has been scrambling to sell its memory chip business, the second largest in the industry after Samsung Electronics Co Ltd, to cover losses from its ailing nuclear reactor division. But suitor Western Digital sued Toshiba in San Francisco County Superior Court for an injunction to stop the sale, arguing that a joint-venture it has with Toshiba at a plant in Japan means the chipmaker cannot sell without its consent.

Western Digital Says It Matched Rivals' Bids for Toshiba Chip UnitIn a filing on July 7, Mark Long, the chief financial officer of Western Digital, said the company’s most recent offer on June 27, made with private equity firm KKR, “is in line with the highest competing bids for (Toshiba’s chip unit) that have been reported in the press.”

The actual dollar figure of Western Digital’s offer is redacted from the document. Western Digital declined to comment. Toshiba did not immediately respond to a request for comment.

Toshiba has asked the court in San Francisco to dismiss Western Digital’s attempt to stop the sale, arguing that the US court does not have proper jurisdiction over a business that is based primarily in Japan and that an injunction would cause it irreparable harm. A hearing is scheduled for Friday.

Aaron Rakers, a managing director with Stifel, said in a note to clients on Sunday that the new filings suggest the two parties could reach a deal before the court hearing.

“Given that some negotiations between (Western Digital) and Toshiba on proposed acquisition terms started over the past month, we think a resolution could be possible prior to the (July 14) hearing,” Rakers wrote.

Toshiba Said to Be Under Pressure to Consider Plan B as Chip Sale Falters

As the $18 billion (roughly Rs. 1,16,325 crores) sale of Toshiba’s memory chip unit to a government-approved consortium falters, some bankers and potential investors are pressing the board to seriously consider alternatives, people with direct knowledge of the sale process said – including picking a new buyer.

Those people say Toshiba’s leadership is sticking to Plan A: selling the world’s second-largest memory chip maker to a Japanese government-backed group that also includes Bain Capital.

But the clock is ticking for Toshiba, which was still recovering from a $1.3 billion accounting scandal in 2015 when it was hit by billions of dollars of cost overruns at its US nuclear unit Westinghouse in December.

Unless it closes a deal by March, a gaping balance-sheet hole will prompt automatic delisting of its shares from Tokyo’s stock market – further battering its shareholders.

As questions emerge around the role of South Korean rival SK Hynix in the preferred bidder group, some Toshiba executives and officials at the company’s main creditor banks say they want top management to look at other options.

“Toshiba hastily picked the consortium ahead of its [June 28] annual shareholders meeting, but more and more flaws are emerging as time passes,” said a senior official at one of Toshiba’s banks.

SK Hynix, which was initially included just to help fund the deal, is now looking to own equity in Toshiba’s chips unit, according to sources, raising antitrust and national concerns in Japan. SK Hynix has not commented.

Addressing concerns that its chip technology could be handed to a foreign rival, Toshiba said previously that SK Hynix would have no equity or management influence.

Scrapping that deal would leave one obvious option: rival suitor Western Digital, which bid for the chip business with private equity firm KKR. But Western Digital, already a Toshiba joint venture partner, is in a legal dispute with the Japanese firm, and sources describe a deep distrust.

But Western Digital could have the support of government-backed Development Bank of Japan (DBJ) and Innovation Network Corp of Japan (INCJ) – both currently part of the preferred buyer consortium – the sources said. They are said to be wary of SK Hynix, and of Toshiba agreeing a sale to the group while Western Digital has sought an injunction to stop it.

“If asked, we are ready to team up with Western Digital and KKR, and we actually prefer that,” said a senior official at one of the government investors.

Both the DBJ and INCJ declined to comment.

A Toshiba spokesman said the firm is negotiating with the preferred buyer consortium to sign a definitive agreement as soon as possible.

Selling other assets seems a less likely avenue, as Toshiba has few of sufficient value, and a piecemeal process could take too long.

It sold its medical equipment business to Canon for $6 billion last year. There are plans to list Toshiba’s smart meter business Landis+Gyr, but that will not plug the gap. Toshiba turned down offers from buyout group CVC and industrial conglomerate Hitachi to buy the business for almost $2 billion earlier this year, sources have said.

Toshiba cannot raise cash by issuing shares because of restrictions imposed by the bourse after the 2015 scandal.

Toshiba Said to Be Under Pressure to Consider Plan B as Chip Sale FaltersDeal or no deal
Toshiba has been scrambling for cash for months – since it shocked investors late last year with news of the cost overruns and delays at Westinghouse, which forced a hefty writedown and losses.

Westinghouse filed for bankruptcy in March in one of the nuclear industry’s most costly collapses to date, leaving Toshiba to cover $6 billion of liabilities it guaranteed.

Even so, investors and some creditors say they fear Toshiba may simply refuse to consider what appears to be the most obvious option.

“Some within Toshiba say they’d rather die than be (acquired by) Western Digital,” said a banking official who has discussed the deal with senior Toshiba executives.

Western Digital is a recent partner for Toshiba – it bought SanDisk, Toshiba’s memory chip business partner for 17 years, in May last year. A leap from joint venture partner to buyer would have to overcome significant distrust.

Last month, Western Digital sought a US court injunction to prevent a sale of Toshiba’s chips arm without its consent.

“We worked with SanDisk over more than 10 years, but it’s been just one year that we’ve worked with Western Digital executives, and we’ve had no good experience from it,” a senior Toshiba executive said.

Two people familiar with the matter said Toshiba believes that even if the court grants the injunction, it can proceed with a chip sale agreement – so long as it holds off completion.

US chipmaker Broadcom, previously considered a major candidate with a $20 billion offer for the Toshiba chips arm, backed off due to legal risks involving Western Digital.

Decision on Western Digital’s Bid to Block Toshiba Memory Unit Sale Postponed

A US judge did not reach a decision Friday in Western Digital’s bid to temporarily block Toshiba from selling its flash memory business in an $18 billion deal but proposed requiring Toshiba to give Western Digital two weeks’ notice before closing.

Toshiba is scrambling to sell its flash memory unit to cover losses from its nuclear reactor business.

In late June, Toshiba announced its preferred bidder was a group made up of Bain Capital, South Korean chip maker SK Hynix and Japanese-government backed banks that offered $18 billion (roughly Rs. 1,15,843 crores).

Western Digital, which is also bidding, sued Toshiba in San Francisco County Superior Court in mid-June, saying it believed a joint venture with Toshiba means Toshiba needs its consent to sell the flash business.

Western Digital’s joint venture with Toshiba helps finance equipment at Toshiba’s plants in exchange for some of their output.

Separately from the California lawsuit, Western Digital is also contesting its consent rights in an international arbitration tribunal. Western Digital filed its lawsuit in San Francisco to prevent Toshiba from closing the sale of its memory unit before arbitration has a chance to play out.

At the hearing, Judge Kahn proposed requiring Toshiba to give Western Digital two weeks notice if it believed it would close the sale before the arbitration finished.

Decision on Western Digital's Bid to Block Toshiba Memory Unit Sale PostponedToshiba’s attorney said they were concerned about agreeing to be bound by the San Francisco court’s jurisdiction. Toshiba has argued that because it is a Japanese company and the deal is taking place mostly in Japan, the court should not have jurisdiction.

Attorneys for Western Digital subsidiary SanDisk, which is formally party to the case, expressed concern that any order in which Toshiba did not agree to the court’s jurisdiction would not be enforceable.

The two sides could not agree, so Judge Kahn instructed them to come up with final language for his proposed order and set a new hearing for July 28, when a related dispute between the two will be heard.

In a statement, Western Digital CEO Steve Milligan called the proposed order and postponement a “victory.”

“Our entire goal was to preserve and protect our rights through the binding arbitration process, and that’s precisely what the court has done today,” Milligan said.

Toshiba called Judge Kahn’s proposed order “a ‘finessed’ alternative to issuing a preliminary injunction” and confirmed it agreed not to close a sale before July 28.

Toshiba Resumes Blocking Western Digital Access to Chip Joint Venture

Toshiba said it resumed blocking access by Western Digital to data at their memory chip joint venture, intensifying its dispute with the US firm over the Japanese company’s planned sale of the chip business.

Toshiba is counting on the sale of the chip business to cover billions of dollars in cost overruns at its now bankrupt US nuclear unit Westinghouse, while Western Digital says any deal would require its consent.

Toshiba allowed Western Digital partial access to shared data servers after the Superior Court of California granted a temporary restraining order earlier this month. But the Japanese company said it resumed blocking access after its petition for an appeal was accepted by the California Court of Appeal on Tuesday.

Toshiba Resumes Blocking Western Digital Access to Chip Joint VentureIn response, Western Digital said that it will file a brief against the decision in the coming days.

The California Court of Appeal issued the temporary stay of the restraining order based only on a brief submitted by Toshiba, and without consideration of Western Digital’s opposition filing, the US company said.

The next hearing on this case has been set for July 28 in the Superior Court of California.

Western Digital has also sought an injunction to block the planned chip-business transaction, arguing that any sale required its consent.

On July 14, the Superior Court of California postponed a decision on Western Digital’s injunction request and proposed requiring Toshiba to give the US company two weeks notice before closing the sale.