HK activist investor demanded Toshiba to sell its entire stake in Kioxia

11 Apr, 2020 07:45
source: Singularity Financial

Singularity Financial Hong Kong April 11, 2020 – by Zohar Keen

A Hong Kong-based activist investor in Toshiba Corp (6502.T) has asked the Japanese conglomerate to sell its entire stake in Kioxia Holdings when the flash memory chip firm is listed in an IPO that could raise up to $32 billion, according to a letter reviewed by Reuters.

Kioxia, the renamed Toshiba Memory Holdings, the world’s second-largest memory chipmaker that was spun out of its parent in 2018, gears up for an initial public offering since mid 2019.

Toshiba Corp. retained a 40% stake after selling it to a consortium led by U.S. private equity firm Bain Capital for $18 billion in 2018 to plug a huge financial hole left by the bankruptcy of its U.S. nuclear business.

Argyle Street Management Ltd, a hedge fund with over $1.5 billion under management, sent the letter to CEO Nobuaki Kurumatani in late March urging the company to sell its entire 40% stake and distribute proceeds back to shareholders.

Uncertainty over the timing of the Kioxia IPO

The initial public offering of Kioxia, the world’s second-largest flash memory chip maker, could be Japan’s biggest listing this year, sources have said. However, the coronavirus outbreak has created uncertainty over the timing of the IPO and valuation of the shares, given that the market for flash memory chips, used in smartphones and data storage servers, is highly volatile.

The deal saw Toshiba reinvest in the unit and together with optical products maker Hoya Corp (7741.T), Japanese firms took more than 50% – a keen wish of the Japanese government, sources had said at the time.

Bain has hired banks including Nomura Holdings Inc. and Mitsubishi UFJ Financial Group Inc. to handle the IPO, people familiar with the matter have said.

Although Toshiba was the leader in NAND flash memory, it was outspent over the years by the likes of Samsung Electronics Co. The South Korean electronics conglomerate controlled 30% of the market at the end of 2018, followed by Toshiba with about 19%, according to researcher TrendForce Corp. The industry is now shifting to so-called 3-D NAND, which Toshiba believes gives it an edge against Samsung.

Toshiba has been facing pressure from activist funds

Toshiba has been facing pressure from activist funds agitating for changes since the company sold 600 billion yen of stock to dozens of foreign hedge funds in late 2017. Nearly 70% of its shareholders are non-Japanese.

Mr. Kin Chan, the CIO of Argyle Street Management and the activist investor behind the letter, was Chief Executive and Managing Director of Lazard Asia Limited from 2000 to 2001 and managed the firm’s advisory business in Asia outside of Japan. Prior to joining Lazard, Mr. Chan was an Executive Director at Goldman, Sachs & Co. where he worked in Hong Kong, New York and Singapore from 1992 to 1999.

According to the Argyle’s letter, Toshiba has explained to Argyle that one of the reasons for the reinvestment was the requirement by Japanese regulators for a significant portion of Kioxia shares to be held by domestic parties.

A source familiar with the matter said Toshiba has tacit understanding with the government that it should not sell down the stake until an IPO, but has no such restrictions after the listing.

The fund also said Toshiba has “substantial headroom” for 400 billion yen ($3.7 billion) in share buybacks, on top of the 700 billion yen repurchase completed late last year, citing gains from the Kioxia stake sale and others as potential sources.

Back in Dec 2018, Argyle Street Management has asked Japan’s Toshiba Corp to exit more non-core businesses such as office machinery company Toshiba TEC to bolster margins of the once-mighty conglomerate. Argyle also had previously opposed Toshiba’s sale of its chip business to a Bain Capital-led group, saying the deal undervalued the prized unit. The sale was completed earlier this year.

Toshiba Corp filed an application to return to the Tokyo Stock Exchange

Toshiba Corp (6502.T) said on last Friday(April 3), it filed an application to return to the Tokyo Stock Exchange’s first section.

The Japanese company was relegated to the second section in 2017 after massive writedowns at its U.S. nuclear power business caused liabilities to exceed assets – a condition for automatic demotion.

The company would have needed at least five consecutive years of audited financial reporting to return to the first section under the Tokyo bourse’s previous rules, but that requirement was reduced to two years this year.