Bain is said to aim for Toshiba chip IPO as soon as 2020
(Bloomberg) -- Bain Capital’s consortium plans to take Toshiba Corp.’s flash-memory unit public two to three years after closing its 2 trillion yen ($18 billion) acquisition of the business, according to people familiar with the matter.
The precise timing of the initial public offering will depend on the unit’s finances and market conditions and could change substantially, said the people, asking not to be identified because the matter is private. The Bain group also plans to institute a stock option program at the memory business so employees will have an opportunity to profit in any IPO, they said.
On Thursday, Toshiba signed a final agreement to sell the business to a group that includes Bain, Apple Inc., Dell Inc., SK Hynix Inc. and Japan’s Hoya Corp., while Toshiba itself will maintain a stake. The deal is structured so that Japanese companies will hold a majority of stock in the business, keeping control of a strategically important business within the country.
The sale has been marked by fierce tensions between Toshiba and Western Digital Corp., its partner in the chips business. The U.S. company argued it should have veto rights in any sale because of their joint ventures and tried to buy the business itself. Toshiba disputes its partner has such rights and allowed three Western Digital rivals to participate in the Bain consortium. The U.S. company has already vowed to fight the sale through arbitration in the U.S. A final ruling may not come until 2019, Western Digital has said.
True to the deal’s tumultuous nature, Bain called a press conference at Tokyo’s upscale Palace Hotel Thursday evening -- only to cancel it as journalists arrived. The firm’s Japan chief explained its partners hadn’t all signed off on the event.
“We thought we could call for the briefing first and get everyone’s agreement in the meantime, but couldn’t,” said Yuji Sugimoto, head of Bain Capital in Japan. “From the business point of view, please rest assured that all of the parties are in agreement.”
Toshiba shares rose 1.7 percent in Tokyo trading Friday, in addition to climbing Thursday after Bloomberg News reported a final agreement could be announced that day.
Toshiba is under pressure to raise money by March to pay for billions of dollars in losses in its U.S. nuclear business -- or see its shares delisted from the Tokyo Stock Exchange. Toshiba expects the deal to close by March 31.
The agreement’s signing is a step toward completing a deal that’s gone through innumerable twists since January. Bain had been selected as the preferred bidder in June, but couldn’t reach a final agreement because state-sponsored Innovation Network Corp. of Japan and Development Bank of Japan backed out of the private equity firm’s consortium in the face of Western Digital’s threats.
Apple played a central role in resolving the auction by providing financial support and ongoing demand. The iPhone maker is keen on the chip unit because of the importance of flash memory chips, used in every iPhone and iPad for storing photos, videos and other data. Only a handful of companies make the highest-end technology and the dominant player is Samsung Electronics Co., a fierce rival to Apple that controls about 40 percent of the global market for flash memory. Investing in the Toshiba unit helps keep the market competitive and improves Apple’s negotiating position.
Bain, meanwhile, is betting on rising demand and rising prices for memory chips in a market with only a handful of players that can afford to build plants.
Western Digital reiterated its legal threats in the past week as Toshiba signaled it was close to a deal with Bain. The U.S. company warned that legal proceedings could drag on till 2019 and put the deal in jeopardy. It also plans an injunction to block the sale.
The Bain agreement calls for the sale to be consummated even if the litigation is unresolved. If that is the case, Toshiba will not transfer its three joint ventures with Western Digital to the acquirers and the purchase price will be adjusted accordingly, unless the transfer of the memory business itself is blocked by injunction, the statement said. Boston-based law firm Ropes & Gray has advised Bain on the deal.
“This is definitely a step forward,” said Mana Nakazora, chief credit analyst at BNP Paribas SA in Tokyo. “But with Western Digital’s litigation still unresolved and considering the way this deal has played out so far, the situation needs to be observed with some caution.”
The acquisition will be funded by 350.5 billion yen from Toshiba, 212 billion yen from Bain and 27 billion yen from Hoya. Hynix will invest 395 billion yen, while U.S. investors will add 415.5 billion yen. The special purpose entity making the acquisition, Pangea, also intends to secure loans of about 600 billion yen.
Under the agreement, Japan’s Toshiba and Hoya will hold a majority of Pangea’s stock. The U.S. investors will not acquire any common stock or voting rights. Hynix has agreed not to increase its stake beyond 15 percent for 10 years.
Separately, private equity firms Blackstone Group LP and Apollo Global Management LLC are said to have teamed up to bid on Toshiba’s bankrupt nuclear power unit Westinghouse Electric Co. and others are considering offers. That deal would also help clean up Toshiba’s balance sheet.
--With assistance from Takako Taniguchi