ASMは企業価値の向上を目指します
  1. What ASM thinks –

“Now that there has been a substantial improvement in the situation, should the disposal of the Memory Chip Business proceed with the original disadvantageous conditions?”

 

Disposal of Toshiba’s memory chip business agreed during the most critical period

During the year ending March 2017, Toshiba fell into insolvency and was faced with the possibility of being delisted.  Concurrently, it was reported that the company fell afoul of its covenants in their financing agreements with various financial institutions and also ran the risk of defaulting on its commitments.

 

Finding itself in such a desperate situation, the decision the Toshiba management team took at the time was to dispose its subsidiary, the Toshiba Memory Corporation (“TMC”).  With questions of further worsening of the company’s relationship with financial institutions hanging, the management’s judgement to cast off the memory chip business for several billion yen’s worth of capital investment was understandable. 

 

However, for the reasons described above, Toshiba had no choice but to conduct a hasty sale of its crown jewel at a huge discount at the time.  Following an auction, TMC was sold to a consortium (“Bain Consortium”) led by Bain Capital (“Bain”).  But the sale process was marred by the ongoing dispute with WD which restricted the number of potential buyers.  Furthermore, the auction schedule was kept short. It was evident that if the process was conducted differently, a better sale price would very likely have been achieved.

 

The transfer price (“Transfer Price”) to Bain Consortium has been announced as JPY2 trillion.  However, there has been only limited disclosure of price adjustment terms in the share transfer agreement and thus the actual corporate value at which TMC was disposed has not been made public.  In addition, the biggest financial contributor within the Bain Consortium was SK Hynix.  It is therefore natural to assume that some sort of arrangement must exist between Bain and SK Hynix but disclosure of such critical issues has been lacking as well. It would be helpful if such arrangements could be clarified.

 

We believe that a huge discount to TMC’s real corporate value has been applied in order to reach the disposal price due to the special circumstances of this transaction as described above.  

 

EGM approving the TMC disposal held before announcement of JPY600 billion fundraising

A resolution to approve TMC’s disposal was adopted at Toshiba’s Extraordinary General Meeting held on 24th October, 2017.  We believe that the shareholders agreed to the disposal as it appeared to be the only way to solve Toshiba’s insolvency.  However, only seventeen days after the EGM, on 10th November, the press reported a fundraising by the company of JPY600 billion and on 19th of the same month Toshiba itself released a public notice regarding the same fundraising.

 

Had the fundraising plan been made public at the time of the EGM, would the shareholders have made the same decision at the EGM?

 

Having overcome the worst, the TMC disposal should be reconsidered

The sale of TMC was a means by which Toshiba sought to overcome the dire situation it found itself in at the time.  Thereafter, the company raised funds of JPY600 billion and also received proceeds from the sale of WEC-related assets.  It is evident that, even prior to completion of TMC’s sale, Toshiba is no longer insolvent as at end of March 2018 and there has been an improvement in its capital.

 

According to information released by Toshiba (p.18 of the EGM notice dated 6th October, 2017), if the sale of TMC is not completed by 31st March, 2018, Toshiba may terminate the sale agreement without incurring any penalty. Furthermore, according to Toshiba’s Timely Disclosure (dated 26th March, 2018), conditions precedent for 31st March completion were not fulfilled as at 23rd March and therefore the earliest completion date under such situation would be 1st May, 2018, based on the terms of the share transfer agreement disclosed on p.14 of the EGM notice. This means that, since completion did not take place by 31st March, 2018, Toshiba is already in a position whereby it can terminate the sale agreement.

 

As described above, it is evident that the price of disposal to the Bain Consortium is at a huge discount to TMC’s intrinsic value. In addition, Toshiba is already in a position whereby it can clearly terminate its sale agreement with the Bain Consortium without penalty and is free to choose whether to continue with the sale or to exercise its termination right. 

 

As such, should the directors proceed to complete the transaction without seeking changes to its terms (sale price and/or price adjustment clauses), there is great risk that this would inevitably seem to be construed as a willful act that results in huge damage to the company’s value and also as a breach of Directors’ Duty of Care under the Companies Act?

 

We strongly believe that Toshiba should reconsider the disposal of TMC.

To elaborate, we believe that Toshiba should aim to renegotiate its terms of sale with the Bain Consortium to arrive at a transfer price which is at or above TMC’s reasonable value. Should this fail, TMC should not be sold to the Bain Consortium but aim to go public via an initial public offering thereby obtaining a valuation of its shares by the market and allowing for the disposal of its shares at a reasonable value.  

 

As is evident from the fact that the agreement could be terminated should the sale of TMC not be completed by 31st March, 2018, we believe that the shareholders thought that, in order to solve Toshiba’s insolvency, they had no choice but to agree to TMC’s disposal at the Extraordinary General Meeting held on 24th October, 2017. Now that Toshiba’s insolvency has been solved, the pre-conditions surrounding TMC’s sale have undergone a significant change. The company should therefore seek again at a general meeting, shareholders’ opinions on various matters related to TMC’s disposal, such as whether the sale is necessary or not, whether they agree to it or not and what its fair price should be etc.. This would have been the rational intention of the shareholders at the time they voted to approve the share transfer agreement that has a termination right.  Such procedure would also be in line with the spirit of the Companies Act which requires a shareholders’ vote at a general meeting regarding the treatment of a significant subsidiary as well as from a corporate governance perspective under the Corporate Governance Code.

 

Currently, we believe Toshiba’s share price is depressed as a result of various uncertain factors regarding its business such as the terms of TMC’s disposal, uncertainty as to whether the transaction will or will not take place, its policy on shareholder return and the earning potential of its businesses other than TMC etc. 

 

Therefore, should it conduct a fundraising at its current share price level that results in dilution, there is an undeniable risk that this would be inevitably construed as an act that willfully imposes huge damage to shareholder value and, as with the decision to dispose of TMC, runs the real risk that this cannot but be interpreted as being in breach of Directors’ Duty of Care under the Companies’ Act?

 

  1. Value of Toshiba Memory Corporation

“What we believe is the inherent value of TMC’s business”

 

As mentioned previously, we believe that the value of JPY2 trillion that was ascribed to TMC under dire circumstances is extremely low. So what would be TMC’s reasonable business value now if it were evaluated as objectively as possible?

 

We engaged a third party expert to conduct a valuation and were given the following results:-

 

JPY3.3 trillion – JPY4.4 trillion

 

The sale price currently agreed to with the Bain Consortium is only worth between 45 to 60 per cent of this valuation.  Even by taking into account various other factors, we do not believe the agreed sale price can be justified. In order to commence renegotiations with the Bain Consortium, we believe the current agreement should be terminated as soon as possible.

 

 

 

Valuation of the memory chip business by Gracchus & Associates, Inc

  • Under Comparable Companies Analysis, companies were initially chosen by assessing their business composition and size etc. after which eight companies were finally selected based on their comparability to the target company. Thereafter, valuation was arrived at giving consideration to the listed companies’ market multiples and share price premium applied in past transaction samples.
  • Under Precedent Transactions Analysis, transactions similar to the target company’s transaction were selected in order to arrive at a valuation.

 

Notes and disclaimers, Gracchus & Associates, Inc:

  • This valuation of the target company was conducted based on limited information on a trial calculation basis.
  • This valuation exercise was conducted by Gracchus and Associates, Inc (“Valuer”), based on constant assumptions and by methods selected by the Valuer.
  • The purpose of this valuation is to provide valuation arrived at by applying constant assumptions and valuation methods but is not aimed at providing an opinion as to the appropriateness and sufficiency of such assumptions or the suitability of the valuation methods. Therefore, the Valuer assumes no responsibility as to the appropriateness of the assumptions nor suitability of the valuation methods. Neither does the Valuer assume responsibility for the validity of the valuation results.
  • The Valuer conducted the valuation exercise based on publicly announced information and data source on the target company. At no point did it hold interviews with or conduct due diligence of the target company.
  • The valuation range arrived at by this valuation exercise was as a result of applying constant assumptions and is not a fairness opinion on the fair value of the company.
  • The data and information etc. that form the basis of this valuation have not been independently verified and the Valuer assumes no obligation and/or responsibility as to their accuracy, validity and integrity. Therefore, should there be gross errors in the data and information used in the assumptions or facts which were not publicly available at the time of valuation but are made public or occur post valuation, there is a possibility that the results of the valuation may vary greatly.