Analysis: The $15 billion scramble for Japan's Toshiba went from bang to whimper
28/03/2023 01:56
(Repeats item published earlier with no changes)
By Makiko Yamazaki and Ritsuko Shimizu
TOKYO, March 27 (Reuters) - Toshiba Corp's 6502.T
auction was supposed to ignite a race for top-dollar bids among
global private equity firms. Instead, it brought months of
uncertainty and a solitary, scaled-back offer from the company's
business partners in Japan.
The $15 billion bid, led by domestic buyout firm Japan
Industrial Partners (JIP) and accepted by Toshiba's board last
week, could finally end years of exhausting battles with
activist shareholders that sparked management reshuffles and
strategy reversals.
Less certain is whether the deal can revive the 147-year-old
conglomerate, which has never fully recovered from a 2015
accounting scandal and the bankruptcy of U.S. unit Westinghouse
two years later.
Major activist shareholders are expected to exit, people
familiar with the matter said. Some, including top shareholder
Effissimo Capital Management, could make huge profits, having
bought their shares cheaply in a 2017 bailout.
Other investors may not be so lucky: the offer price
represents a 15% discount from December 2014, before the
accounting scandal. It also represents a 22% discount to the
lifetime high hit in June last year.
Many of the 23 companies investing alongside JIP have ties
to Toshiba. Some were introduced to JIP by Toshiba's management,
some of the people said, declining to be identified because the
information is not public.
Some others were introduced by the trade ministry, one
person said.
The investors include longtime business partners such as
Chubu Electric Power 9502.T . "Toshiba has been a very
important business partner," said a person at one of the
companies.
Toshiba's management, including CEO Taro Shimada, will stay
on, while the government keeps Toshiba's sensitive defence and
nuclear technologies in Japanese hands.
"It has been a complete mess," said analyst Mio Kato of
LightStream Research, which publishes on Smartkarma.
The process involved "too many stakeholders making strong
demands of management in ways that conflicted with each other,"
he said.
Activists also "grossly underestimated" the difficulty and
time required to fix Toshiba, he said.
Major shareholders have declined to comment, as has the
trade ministry.
LACKLUSTRE ENDORSEMENT
Toshiba's board, which includes representatives from Paul
Singer's Elliott Management and Farallon Capital Management,
formally accepted JIP's offer of 4,620 yen a share, Toshiba said
in a statement on Thursday, valuing it at 2 trillion yen ($15.2
billion).
But the board refrained from recommending investors tender
their shares, deeming even JIP's initial offer of up to 5,500
yen per share "unsatisfactory", Toshiba said.
The price was scaled back as Toshiba's earnings worsened.
Some top shareholders had previously told Reuters that 6,000
yen was a threshold to get the buyout done.
Now top activist shareholders are tired of the drama and
eager to exit, according to some of the people, even at the
"shockingly low" price, one of them said.
At the end of a year-long auction process JIP's was the only
"comprehensive" bid remaining, the company said.
"The situation where the buyers were not able to come to
agreement continued for a long time. They've now found common
ground and the path to restructuring is clearer," said Takamasa
Ikeda, a portfolio manager at GCI Asset Management.
Some global private equity firms including KKR & Co KKR.N
backed off early, in part due to concerns about antitrust
hurdles and government scrutiny of sensitive technology.
JIP had initially teamed up with a state-backed fund, Japan
Investment Corp. They later parted ways, disagreeing over JIP's
intention to keep CEO Shimada and his team.
Japan Investment Corp later discussed joining up with Bain
Capital, giving the U.S. private equity firm a much-needed local
partner. But the state-backed fund opted to sit out, believing
its plan for deep restructuring would not appeal to management,
sources said.
Bain in 2018 bought a majority stake in Toshiba's most
important asset, its memory chip business, later renaming it
Kioxia Holdings.
PREFERRED BIDDER
The drawn-out process meant Toshiba missed the window for an
"ideal valuation" when tech stocks were still going strong,
LightStream's Kato said.
JIP was named the preferred bidder in October but faced
pushback from banks over its plan.
"If management stays and pursues the current strategy, we
can't see how they would improve the company," one banker said
late last year.
JIP eventually agreed to dispose of underperforming
businesses in the event of earnings deteriorating - a condition
from the banks to get 1.2 trillion yen in senior loans, people
said.
Then Chief Operating Officer Goro Yanase played a big role
in consolidating the JIP proposal, multiple people said. He
abruptly resigned in February, over inappropriate use of
entertainment expenses.
The retention of Shimada and, before his removal, Yanase,
were bank conditions for the loans, the company said.
Toshiba felt stable shareholders were desirable to end the
tumult, unlike current shareholders "with many differing views",
it said.
JIP does not see the need for big strategy adjustments,
Toshiba said.
(Reporting by Makiko Yamazaki and Ritsuko Shimizu; Additional
reporting by Scott Murdoch in Sydney, Kane Wu in Hong Kong and
Mayu Sakoda and Hiroko Hamada in Tokyo; editing by David Dolan
and Jason Neely)
((david.dolan@thomsonreuters.com; +81 3 4563 2708;))