Toshiba plans to make its memory chip business separate company

PanARMENIAN.Net - Toshiba Corp's (6502.T) board on Friday, January 27 approved plans to make its core memory chip business a separate company and seek outside investment in it, aiming to avoid being crippled by an upcoming multi-billion dollar writedown for its U.S. nuclear business, Reuters reports.

The drastic step will be only one of many tough choices the Japanese conglomerate must take, as the proceeds are set to cover just part of the charge for cost overruns at a newly acquired U.S. power plant construction business - a figure that local media has put at 680 billion yen ($6 billion).

Toshiba's memory chip business - the world's biggest NAND flash memory producer after Samsung Electronics (005930.KS) - is its crown jewel, accounting for the bulk of its operating profit.

Toshiba is looking to sell roughly 20 percent for more than 200 billion yen and potential investors include private equity firms, business partner Western Digital Corp (WDC.O) and the government-backed Development Bank of Japan, sources have said.

It is rushing to complete the sale by the end of the financial year in March as failure to do so will likely mean that shareholder equity - whittled down to just $3 billion in the wake of a 2015 accounting scandal - would be wiped out by the charge.

Mark Newman, an analyst at Sanford Bernstein in Hong Kong, said the move would only be a short-term band-aid.

"The NAND business is the only one with value, as it makes up all of the semi-conductor profits, which comprise 75 percent of the overall company's profit. I won't be surprised if they sell another 20 percent in a few years time and then another 20 percent."

It also remains to be seen how well the sale process will go given Toshiba's tight timeframe to get it done and caution on the part of potential investors.

"Partnering with Toshiba could be risky due to uncertainties over its nuclear business," said an official at a global private equity firm.

"Chip businesses are highly cyclical and need massive capital investment. Funds are cautious because they have had their fingers burnt with chip investments in the past," said the official, who was not authorised to speak to media and declined to be identified.

A raft of private equity funds, including Silver Lake and Permira, have signed non-disclosure agreements with Toshiba, sources said.

While Western Digital, which operates a NAND plant in Japan with Toshiba, may seem like a natural buyer of a large stake in the chip business, a sale might be difficult to pull off before March as it would likely invite a review by anti-trust regulators.