Toshiba(TOSYY) Under Pressure, Confirms Reports Of Potential Semiconductor Spinoff

Toshiba Corp. (TOSYY) has today acknowledged that recent speculation about a potential sale of its flash memory business was bang on the money. The Nikkei newspaper reported earlier this week that the Japanese conglomerate may sell a 20 percent stake in the chip operations, raising as much as 300 billion yen ($2.7 billion).

Memory is Toshiba’s most profitable unit, accounting for more than half of the group’s operating profit in the first half of fiscal 2016.

An IPO of the stake is being considered, along with a minority sale to Western Digital (WDC) with a target of completing the transaction by the end of March according to Reuters. Toshiba confirmed it is “studying the possibility of splitting it into a separate company. However, at this point, nothing has been decided”.

Toshiba has had a torrid few years which have left it in a precarious financial position. An accounting scandal in 2015 saw the company levied with a record fine in Japan for inflating profits and it was reported on January 4th 2017 that fresh evidence has been discovered by the US SEC, suggesting further litigation is likely.

In December 2016, Toshiba announced that it will have to book “several billion dollars” of write-downs on its US nuclear division. An impairment of this scale may be sufficient to wipe out shareholders’ equity. Toshiba’s banks are understandably worried with credit metrics deteriorating and recent rating agency downgrades. Furthermore, the Tokyo Stock Exchange placed Toshiba on its ‘watchlist’ following the 2015 accounting scandal, and gave the company a deadline of March 15th 2017 to improve its internal controls or face delisting. This effectively removes the option of raising equity capital.

The company is currently in talks with creditors about how it can survive.

With Toshiba under pressure and considering a sale of its crown jewel, spinoff investors should expect a bargain.

Disclosure: Author holds no position in any stock mentioned.