Bain's Japan chip IPO is a tough sell

Western Digital

03/12/2024 05:22

(The author is a Reuters Breakingviews columnist. The opinions
expressed are her own.)
    By Robyn Mak
       HONG KONG, Dec 3 (Reuters Breakingviews) - Bain Capital
has a tricky job on its hands. The private equity firm is set to
list Japanese memory-chip maker Kioxia six years after leading
its bold carve-out from Toshiba. Trouble is, it means poor
returns for the sellers. And Kioxia's crippling debt pile may
put off potential new investors.
    In 2018, a consortium including the U.S. fund, Apple
 AAPL.O  and South Korea's SK Hynix  000660.KS  took control of
the once-prized asset from its scandal-hit parent for 2 trillion
yen, about $18 billion at the time. The leveraged buyout was
heralded as a landmark for Japan Inc, not least because of its
size, complexity, parties involved and political backlash
against foreign control of strategic technology. But Bain
managed to pull it off.
    Finding an exit has been a grind. A crash in the notoriously
cyclical semiconductor market forced Kioxia to shelve initial
public offering plans in 2020; a merger with Western Digital
 WDC.O  was nixed last year following opposition from SK Hynix.
Bain then revived IPO proceedings a few months back, only to put
them on hold after valuation disagreements with global
investors, according to Reuters, citing sources.
    Now, a listing is on again. Trouble is, the 784 billion yen
market valuation, about $5 billion at current exchange rates, is
obviously far less than the purchase price six years ago and 20%
lower, even, than Toshiba's gain on the sale at the time. It's
also half the 1.5 trillion yen Bain was pushing for in October,
per Reuters, and values Kioxia stock at just 1.5 times book
value as of June, lower than SK Hynix, Western Digital and
Micron  MU.O , according to LSEG.
        The discount is needed, though. Kioxia's 1.2 trillion
yen of net debt in June is a whopping 14 times adjusted EBITDA
in the fiscal year to the end of March 2024. 
        True, the company's prospects are improving as memory
chip prices rise. But servicing its debt will be a burden,
especially with rivals pouring huge sums into new tech and
factories. Over the past three-and-a-half years, Kioxia has
reinvested just 27% of revenue into capital expenditure, below
the aggregate 37% at key rivals, according to analyst Nicolas
Baratte who publishes on SmartKarma. 
         Toshiba and Bain are set to take a loss on the stakes
they intend to sell in the IPO, excluding any dividends and fees
paid. Perhaps that'll help grease the listing's wheels. Either
way, getting the deal done is important to protecting Bain's
reputation in what's arguably the world's hottest private equity
market. 
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    CONTEXT NEWS
    Japan's Kioxia has set a tentative price range of 1,390 to
1,520 yen ($9.22 to $10.09) per share for its initial public
offering, a filing showed on Dec. 2. At the midpoint, it would
value the memory-chip maker at 784 billion yen ($5.23 billion).
    As part of the IPO, Kioxia plans to issue 21.6 million new
shares, which would raise 31.4 billion yen at the midpoint of
the range. Owners Toshiba and BCPE Pangea, a fund owned by Bain
Capital, will also sell a total of 50.4 million shares at the
same price, worth 73.3 billion yen.
     The shares are expected to list on Dec. 18.

 (Editing by Antony Currie and Ujjaini Dutta)
 ((For previous columns by the author, Reuters customers can
click on  MAK/   
robyn.mak@thomsonreuters.com))