Uncertainty over Toshiba Likely to Continue with Massive Debt

By Shunichi Okada / Yomiuri Shimbun Staff Writer

17:06 JST, March 24, 2023

Toshiba Corp. has paved the way for the company to go private after accepting a buyout offer from a domestic consortium led by Japan Industrial Partners Inc., but many challenges lie ahead, as the Japanese conglomerate grapples with growth strategies and uncertainty about whether foreign funds will agree to the tender offer.

When Toshiba’s board decided to accept the buyout offer on Thursday, there was relief among people involved with the struggling company.

“Going private should allow [the company] to reallocate management resources to investments for growth in the future,” a source close to Toshiba said.

The buyout price was the main point of contention in negotiations over the JIP proposal, according to sources.

Toshiba’s special committee of outside directors includes people from foreign funds known as “activist shareholders.” If the foreign funds agree on the tender offer deal, it will clear the path for Toshiba to go private — a move that will reduce the influence of activist shareholders and allow greater management freedom for the company.

The takeover deal will require approval from more than two-thirds of the company’s shareholders. In light of this, it is crucial to ensure that a sufficient premium over Toshiba’s share price at the time of acquisition is offered.

The company’s share price temporarily rose to ¥6,000 in June last year in anticipation of a buyout before receding, and it has been sluggish since then. Whether Toshiba can obtain approval from activist shareholders and others will be a focus of attention, with some in the JIP-led group expressing difficulty in raising the premium level.

The company said Thursday the tender offer price is ¥4,620 per share, 10% higher than the closing price on the same day.

Tangled negotiations

In April 2022, Toshiba publicly solicited management restructuring plans, including delisting. By the end of May, 10 groups had presented proposals, and the JIP-led consortium obtained preferential negotiation rights in October. After that, it took six months to reach a deal. To procure massive funding, the JIP proposal involved a group of banks and many companies that were considering investing. Coordination with the banking side subsequently ran into rough waters over loan conditions and other terms.

In the meantime, Toshiba was forced to cut its full-year earnings estimate twice for the fiscal year ending March 2023, partly due to a slump in demand for hard disk drives among data center customers.

The negotiations became tangled further after Goro Yanase, a former Toshiba vice president believed to have played a central role in the negotiations, was forced to resign in February over the inappropriate use of expenses.

Challenges

Even if Toshiba successfully goes private, the company is expected to face a number of challenges. It will have to achieve growth to repay ¥1.4 trillion in loans from creditor banks, which have indicated they will dispatch financial personnel to oversee Toshiba’s management in the event of a successful takeover.

Toshiba also needs to rework its medium- to long-term business strategies. The digital data business was identified as a pillar of its earnings in its medium-term management plan released last year. The company has drawn up a strategy to make the sector account for about 20% of its operating profits by fiscal 2030. However, it will be no easy task to raise funding for the investment necessary to proceed with the plan, while paying off its massive debt.

“Toshiba is an important company for Japan,” said a senior official of one of the creditor banks. “We need to make sure the company repays its debts as we’ll all be taking a risk by extending loans.”