Toshiba Share Sale Opens Door to Einhorn, Loeb, Other Activists

(Bloomberg Technology) -- Toshiba Corp.’s plan to raise more money may bring in vocal investors more willing to take an active role in the electronics maker’s affairs.

David Einhorn’s Greenlight Capital, Daniel Loeb’s Third Point and other investors have agreed to buy 600 billion yen ($5.4 billion) worth of newly issued shares, an extra cushion of cash on top of the already-agreed 2 trillion-yen sale of the Tokyo-based company’s chips business to a group led by Bain Capital.

While that deal is still on track, there were risks to its completion by the end of March, Toshiba’s deadline to reverse negative shareholder equity and avoid being delisted. Now, the tradeoff is that a total of about 60 funds, including Effissimo Capital Management Pte, will now become shareholders controlling a bigger stake in Toshiba. The sale of 2.28 billion new shares will represent about a third of the company after they are issued, giving them a platform to push for changes. That could lead to more parts of the company being sold off, or deeper jobs cuts, according to Mitsushige Akino, an executive officer at Ichiyoshi Asset Management Co.

“Foreign funds and activists may be proposing changes and restructuring to Toshiba management in future,” Akino said. “Toshiba’s management may want to take advantage of such pressure from overseas funds to carry out large-scale reforms, which require job cuts and asset sales.”

Toshiba shares fell as much as 6.2 percent at midday in Tokyo on Monday, to 274 yen. The proposed transaction, which was approved by Toshiba’s board on Sunday, set the sale price at 262.8 yen per share, or about 10 percent less than Friday’s closing price. Toshiba said in a statement that it expects the share sale transaction to be completed early December.

Toshiba also said it’s exploring the divestment of its Westinghouse-related assets in a bid to avoid being delisted from the Tokyo Stock Exchange. Toshiba is struggling to recover from multibillion-dollar losses in the Westinghouse nuclear operations in the U.S.

Toshiba’s flash memory unit may not be sold in time to bring in the necessary capital, because it needs to clear competition laws in different countries. Another risk to the chip division sale is a spat between Toshiba and business partner Western Digital Corp., which has argued it should have veto rights in any sale because of their joint ventures and tried to buy the unit itself.

If the transactions are successful, Toshiba expects the consolidated negative 750 billion yen on its balance sheet will be erased by the end of the fiscal year in March.

“Eliminating excessive debt and bolstering capital can certainly be seen in a positive light,” said Masahiko Ishino, an analyst at Tokai Tokyo Securities. “But dilution is still something to be reckoned with.”

How to Make Enemies and Lose Influence in the Chips Business

Effissimo, an investment firm based in Singapore run by Japanese investors, is already Toshiba’s biggest shareholder, with a stake of about 10 percent. It’s also buying the largest block of stock, 320 million shares, in the new share sale. While Effissimo probably won’t take an activist role in Toshiba, Third Point has pushed for changes at Japanese companies in the past, notably Sony Corp. and Fanuc Corp. Greenlight Capital announced in July that it had taken a long position in Toshiba.

“The foreign funds and activists are seeking upside, betting on the possibility Toshiba will achieve a V-shaped recovery,” Akino said. “They have an eye on the fact that Toshiba is a huge company, which still has many businesses to be sold off, and they think they can recoup a profit even though they need to take some risks.”

The share sale will also provide a cushion while Toshiba aims to clean up the mess in its nuclear energy division. Private equity firms Blackstone Group LP and Apollo Global Management LLC have teamed up to bid on Toshiba’s Westinghouse unit and others are considering offers, people familiar with the situation said in September. The nuclear unit, which was contracted to build two power projects in the U.S. that were both billions of dollars over budget and years behind schedule, filed for bankruptcy in March.

Selling its holding in the nuclear-power business Westinghouse, and any liability for claims, will let Toshiba “significantly reduce” resources required to rehabilitate that unit, funds that can be focused on new businesses, the company said in the statement Sunday.

Toshiba aims to use the capital it gains from the share sale for a full payment of so-called “parent-company guarantees” related to its Westinghouse unit, according to the statement. If Toshiba settles obligations to Westinghouse creditors, it will then be able to request reimbursement from the U.S.-based reactor-maker. Toshiba will then sell the claims against Westinghouse and focus on rebuilding its remaining business units.



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