Toshiba expects suitors for assets ahead of split

Toshiba is expecting offers for a number of its most attractive businesses from private equity and strategic buyers even before it begins a process to split itself into three new companies.

The likely flow of offers, which people close to the Japanese conglomerate expect to begin before the end of December, follows Friday’s announcement of a historic restructuring of the 140-year-old industrial giant.

Although the proposed three-way split has yet to be approved by shareholders and would not be completed until 2023 at the earliest, one person with direct knowledge of the situation said the company was open to potential divestments.

However, some investors said shareholder approval of the split should not be seen as a done deal and that the company still needed to convince them this was the best option.

A $20bn offer for the conglomerate in April by CVC, the UK private equity group, boosted its share price on hopes Toshiba would proceed with what would be Japan’s biggest-ever buyout.

But after a rare and successful revolt by shareholders demanding either a buyout deal or a radical restructuring, Toshiba was forced to assemble a special committee to examine options for reducing the company’s hefty “conglomerate discount”.

The Toshiba committee said the split would be made using a new tax scheme the Japanese government created to encourage spin-offs, turning to a model being tried by global conglomerates such as General Electric.

“We concluded this approach provides shareholders [with] the greatest potential for value enhancement with significant flexibility and opportunity for increased returns,” said Paul Brough, the committee’s chair, at a news conference.

One of the three companies will predominantly hold Toshiba’s infrastructure, nuclear and heavy engineering operations, as well as sensitive technology in areas such as artificial intelligence and quantum computing. The business will probably fall under the protection of Japan’s newly tightened Foreign Exchange and Foreign Trade Act.

Another company would operate as an asset management division and hold Toshiba’s 40 per cent stake in Kioxia, the memory business it part-sold to private equity group Bain Capital in 2018. Toshiba Tec, the company’s successful office and retail machinery manufacturer, would also be part of this division. The third will specialise in smaller devices and semiconductors.

The new companies will aim to list their shares by the second half of the 2023-24 fiscal year.

The proposed restructuring is the result of almost five months of deliberations over how to restore the fortunes of a company that came close to collapse in 2017. The plan needs to win the approval of shareholders at an extraordinary general meeting to be held by the end of March.

The committee said in a statement to shareholders that it had engaged with six private equity firms to explore privatisation but concluded the price levels envisioned by the buyout funds were “not compelling relative to market expectations”.

It also cited uncertainties raised by private equity funds, including Fefta, antitrust hurdles and the difficulty of valuing Kioxia. Bain’s plans for the memory business are unclear after a planned IPO for the company was postponed last year.

As part of the financial engineering deployed to try to end the period of turmoil following the near-collapse of the company, Toshiba issued new shares. A large proportion of these ended up in the hands of activist investors who have defeated management in shareholder votes.

Despite an account from the committee of its efforts to draw a compelling buyout deal from private equity, some investors continued on Friday to question why an auction process with formal due diligence was not carried out with the buyout funds.

Other shareholders said the likelihood of the plan being passed at the EGM would depend on how the company’s shares traded over the next few weeks and months. Ahead of the announcement, the stock fell 1.3 per cent to ¥4,872 ($43).

“If it heads up towards ¥6,000 to ¥6,500, I think that it will likely get through. If the market keeps the shares where they are now, or if they fall, I think there is a real risk that this gets rejected and then we are back to wishing for a PE buyer to come in,” said one shareholder who has held the stock for more than five years.