Toshiba mulls sale of controlling stake in Westinghouse unit

Toshiba Corp.’s troubles deepened yet again as the Japanese company missed a second deadline to report earnings and said it may sell a majority stake in its Westinghouse nuclear business.

The Tokyo-based conglomerate is reevaluating Westinghouse’s position within the group and it may deconsolidate the nuclear unit by selling a controlling equity stake. Toshiba made the announcement as it gained approval to delay the release of third-quarter earnings until April 11.

Westinghouse has been at the center of Toshiba’s most recent problems amid cost overruns on nuclear projects and related litigation. While the company was due to report final figures on Tuesday, it said it needed more time to examine reports of “inappropriate pressure” internally to push through the acquisition of a U.S. construction firm specializing in building atomic plants. Toshiba has estimated it will need to take a writedown of 712.5 billion yen ($6.2 billion) but it hasn’t been able to get its auditors to sign off on the earnings results.

“We need further reforms to overcome the difficulties resulting from the accounting scandal and losses in the nuclear business,” said President Satoshi Tsunakawa in a press briefing Tuesday afternoon. “That’s something myself the management and employees have to take responsibility for and work toward bringing the company back on the path of growth.”

Toshiba said Tuesday its planning to sell about 160 billion yen of assets in the 2016 fiscal year. It also plans to cut the number of board members and have a majority of directors from outside the company. Shares gained 0.5 percent at the close in Tokyo after falling as much as 8.8 percent.

“The shares are up because the company has come out and shown its willingness to make strategic decisions about Westinghouse,” said Hideki Yasuda, an analyst at Ace Research Institute. “The uncertainty over the extent of losses in the nuclear business has been the number one source of worry. Sloughing it off would bring stability and a higher valuation for Toshiba.”

Westinghouse appears to be already assembling a team of lawyers and advisers to help with the restructuring. The company has hired PJT Partners Inc., people with knowledge of the matter have said. Lisa Donahue of AP Services, LLC, an affiliate of AlixPartners, will lead the Pittsburgh-based company’s operational restructuring efforts, according to a spokeswoman at Westinghouse. It also brought in bankruptcy attorneys from Weil Gotshal & Manges LLP, Reuters reported earlier.

It’s not clear who — if anyone — would be interested in Westinghouse given its problems. The most likely buyers may be from China or South Korea, which are developing their own reactors for export, according to analysts and academics. The region is also home to about half the world’s nuclear units under construction, while China is forecast to have the largest fleet of reactors by the middle of next decade.

A sale of Westinghouse to state-run Chinese companies might run into national security concerns or political challenges in the U.S. and Japan, according to George Borovas, the global head of the nuclear group at Shearman & Sterling LLP, a New York-based multinational law firm. That could leave South Korea as a better fit. Korea Electric Power Corp. said it would consider a purchase if it receives a proposal from Toshiba.

“Nothing has been confirmed or decided. Kepco is closely watching the market/industry and is willing to review the purchase if it receives a proposal from Toshiba,” said a spokesman for the state-run company, asking not to be named because of internal policy.

The uncertainty over the valuation of Westinghouse has held up the auditor’s approval for Toshiba’s third-quarter earnings. Toshiba now has until April 11 to report earnings, though it can request another extension.

The Tokyo Stock Exchange kept Toshiba on its list of securities on alert in a December announcement, after originally being included for overstating profits from 2008 through 2014. The company is due to file a report detailing plans to improve internal controls to the bourse on March 15. If deemed insufficient, the company will face delisting.

The stock, which has dropped 24 percent this year, will be moved to the second section of the TSE, Tsunakawa said. The downgrade, which is likely to come after the company reports full-year earnings, will trigger an automatic sell off by index funds. Tsunakawa declined to comment on the possibility of delisting.

To raise cash and patch its balance sheet, Toshiba has already said it will sell a significant stake in its flash memory operations. The company has sent letters soliciting offers for the chip business, seeking bids that value it at about 1.5 trillion yen, and expects replies by the end of the month, people familiar with the matter have said.

The Japanese conglomerate would be willing to sell the entire business. Potential bidders that have expressed interest in the the chip unit include Korea’s SK Hynix Inc., Taiwan’s Foxconn Technology Group, Western Digital Corp. and Micron Technology Inc., the people said. Among the financial bidders are Bain Capital, Silver Lake Partners and KKR & Co., the people said. Tsunakawa said in the press briefing that the company wants to choose a buyer for the business as soon as possible in fiscal 2017.

“The shares will be largely moved by two things, whether the company can limit losses in the nuclear business and the prospects for delisting,” said Kazunori Ito, an analyst at Morningstar Investment Services. “For many institutional investors, Toshiba’s stock has become untouchable.”

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