A radical plan to split Toshiba into three companies has set Japan's oldest conglomerate on a new collision course with investors, after some immediately said they would reject the proposal.
A $20 billion offer for the conglomerate in April by CVC, the UK private equity group, boosted (€17 billion) 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”.
Scheme
The Toshiba committee said the split would be made using a new tax scheme the Japanese government has created to encourage spin-offs, turning to a model used by global conglomerates such as General Electric. The proposal leaves open the possibility that at least one of the businesses – probably a company specialising in smaller devices and semiconductors – could be sold to private equity.
“We concluded this approach provides shareholders the greatest potential for value enhancement with significant flexibility and opportunity for increased returns,” Paul Brough, the committee’s chair, said 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 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 nearly five months of intense 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.
Privatisation
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 citied 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.
Since the plan for the three-way split was leaked this week, nine investors representing about 30 per cent of Toshiba’s share register have said that the proposal was disappointing and unrealistic.
Following the announcement on Friday, one investor questioned why an auction process with formal due diligence was not carried out with the buyout funds.
“The reality is they haven’t run a competitive process and the price would be way higher than the numbers the private equity funds probably said as a general conversation,” the investor said.
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 ($42).
“If it heads up towards ¥6,000 (€45.95) 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 over five years. – Copyright The Financial Times Limited 2021
