Toshiba Favors Bain Consortium Bid, Foxconn Still Interested

Toshiba Corp's TOSYY flash memory chip business continues to garner attention from prospective suitors. Recently, Taiwan-based electronics manufacturer Foxconn reiterated its interest in the chip unit, which the Japanese conglomerate jointly runs with Western Digital WDC.

Foxconn: Not a Preferred Contender

Foxconn had never been a serious contender due to its significant presence in China. Although the company claims support from the likes of Apple AAPL and Dell, we believe that it's highly unlikely that Toshiba will reconsider the proposal. This is primarily due to the opposition from the Japan government, which now wants to keep the technology within its domestic boundary.

Nevertheless, the renewed interest from Foxconn shows the importance of the flash memory technology, which is now preferred over legacy hard-drive storage systems due to speed and reliability. Notably, Toshiba is the second-largest NAND flash memory maker.

Toshiba recently stated that it is now favoring a consortium led by Bain Capital and supported by the Japan Government instead of the U.S. chip-maker Broadcom AVGO.

We note that Bain Capital's reported bid of 2.1 trillion yen (approximately $19 billion) was slightly lower than Broadcom's a 2.2 trillion offer (almost $20 billion). However, both were higher than the company's valuation of 2 trillion yen.

Transaction Faces Legal Hurdles

Toshiba expects to make a final decision by Jun 28. The company is in a hurry to close the transaction as it is in dire need of funds to remain as a listed entity.

Currently, the company has a negative shareholder's equity after it posted a massive loss of 950 billion yen (almost $8.6 billion) in the fiscal year ended March. Most of the loss can primarily be attributed to write-downs related to its now-bankrupt Westinghouse nuclear business.

However, the divestiture process faces significant hurdles due to objections from Western Digital, Toshiba's joint venture (JV) partner. The company is seeking arbitration and recently sued the Japanese conglomerate in a California court. Per Reuters, Western Digital expects to get a ruling over its injunction appeal by mid-July.

Reportedly, the Bain led consortium has asked Toshiba to resolve the dispute with Western Digital, before it invests in the business. Per Reuters, this could prompt Toshiba to postpone the voting process.

We believe that a negotiation offer from Toshiba will benefit Western Digital. The company has already heaved a sigh of relief following Broadcom's backing out of the deal after the law-suits. A negotiation that can eventually lead to a stake in the lucrative chip-unit will strengthen Western Digital's competitive position in the NAND flash memory market.

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