To Block Sale Of Toshiba’s Chip Unit, Western Digital Takes Legal Action

Potentially derailing a much-needed capital injection for the Japanese conglomerate, Western Digital Corp has sought international arbitration to stop partner Toshiba Corp from selling its chips arm without its consent.

Sources have said that having put in a much lower offer than other suitors, Western Digital is not a favored bidder for the world’s second biggest NAND chip producer, even though the two companies jointly operate Toshiba’s main semiconductor plant.

An auction that has attracted suitors such as private equity firm KKR & Co LP, Taiwan’s Foxconn and U.S. chipmaker Broadcom and that could fetch some $18 billion could be delayed or put an end by a legal battle.

To cover billions in dollars in cost overruns at its now bankrupt U.S. nuclear unit Westinghouse, Toshiba is depending on the sale. The Japanese firm said in an unaudited earnings release on Monday that it had negative shareholder equity of 540 billion yen and logged a 950 billion yen ($8.4 billion) annual net loss.

Demanding Toshiba reverse a move to put their joint venture assets into a newly formed unit – Toshiba Memory – and stop any sale without Western Digital’ s consent, Western Digital has begun arbitration procedures with the International Chamber of Commerce after months of souring relations.

Western Digital’s “efforts to achieve a resolution to date have been unsuccessful, and so we believe legal action is now a necessary next step,” CEO Steve Milligan said in a statement.

Toshiba would push on with the sale, sticking to its plan to complete the second round of bidding on Friday and the complaint was groundless, Toshiba CEO Satoshi Tsunakawa told a news conference.

“We will make efforts to convince bidders of the legitimacy of the chip-unit sale and wipe away their concerns,” he said.

A change of control by the other partner cannot be blocked by any partner, Toshiba argues. When it bought current unit SanDisk, and never sought or received Toshiba’s approval, Western Digital itself acquired the joint venture interest, it says.

But only if the Japanese company is acquired by a third party, Toshiba will be allowed not to seek approval under the contract, Western Digital counters.

As fresh funds are urgently needed to shore up its balance sheet, as well as upend financing plans, the escalating dispute could also further jeopardize Toshiba’s Tokyo bourse listing.

Toshiba hopes to offer a stake in the chip unit as collateral for new loans from major lenders, a measure that the banks say also requires Western Digital’s approval. Sources with direct knowledge said last week that the most feasible buyer for the business would be a consortium made up of KKR and Japanese government-backed investors, Toshiba believes.

While the California-based firm has said it needs to take control of the unit in order to be fully in charge of operations, the Japanese government has proposed that Western Digital join their consortium as a minority investor, separate sources have said.

Since it does not apply to SanDisk employees, any move would not affect joint venture operations, Toshiba has said.

(Adapted from Reuters)

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