February 14, 2017 / 12:41 PM / in a year

Toshiba memory-chip selloff is drastic medicine

HONG KONG (Reuters Breakingviews) - Toshiba has opted for drastic action. On Tuesday, the struggling Japanese group unveiled a $6.3 billion writedown, a plunge into negative equity, an end to building new nuclear plants, and the resignation of its chairman. The delivery was chaotic but those messages had already been well-telegraphed, and Chairman Shigenori Shiga’s involvement with the troublesome nuclear business made his position clearly untenable. The possible sale of a majority of its most valuable unit – the bit that makes flash-memory chips – is new, and reveals the depth of its crisis.

The company somehow managed to botch what was already going to be a difficult setpiece. Scheduled results at midday Tokyo time did not arrive, and Toshiba said it needed another month to probe “management pressure” at Westinghouse, the U.S. unit at the heart of its troubles. Hours later, it released earnings guidance and unaudited numbers anyway. To say Toshiba’s bosses are not in control of events is an understatement: in December the electronics giant dropped the original bombshell that what had looked like a small, add-on deal in nuclear had brought billions of dollars of extra risk.

Toshiba now expects to have 150 billion yen ($1.3 billion) of negative equity when its financial year ends in March. Fixing that requires selling assets for more than their book value, and raising new capital. The biggest and most obvious lever to pull is to sell a stake in Toshiba’s NAND memory unit, whose chips are used for data storage in mobiles and tablets. Industry players, including South Korea’s SK Hynix, and buyout firms are already circling.

Previously the idea was to sell a reasonably small chunk of the business – perhaps 20 percent. While Toshiba has a lot of other interests, spanning energy and infrastructure, NAND is by far the most valuable chunk. Macquarie recently estimated it was worth 1.4 trillion yen, or 70 percent of the overall business’s theoretical equity valuation, on a sum-of-the-parts basis before any new share issuance. Losing control of this business will leave Toshiba much diminished. Or at least with a size that matches its management capabilities.


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