Toshiba can eat its cake and keep it

It looks like a Toshiba’s memory division finally will be sold, and the cash-strapped conglomerate can get a much-needed cash infusion. A consortium constructed by Bain capital has been selected by Toshiba as the winning bid (not necessarily the highest bid), that also can satisfy the Japanese authorities. The deal can still be derailed by Western Digital that has several joint ventures with Toshiba and has sued the corporation to stop the transaction.

 

It has been incredibly complicated for Bain to navigate the many stakeholders and get to a deal. Not only has there been the national interests of Japan to protect but also many different stakeholders have been trying to get a share of TMC. Several customers like Apple, Dell and Kingston, are working to hedge themselves against further increases in Flash pricing by getting a share of the profits joined by suppliers, competitors and joint venture partners.

There have been several antitrust issues to be avoided. Seagate, Toshiba and Western Digital (part of the competing bid from KKR & Co) have full control of the hard disk market and Toshiba, Hynix and Western Digital combined would control more than 43% of the NAND flash markets. Both of these antitrust issues would prevent a normal acquisition of the Toshiba Memory Corporation.

 

 

The construction from Bain involves eight different investment partners. To make the deal palatable to authorities and Toshiba, Bain is creating an investment vehicle with several different share classes to isolate some of the joint venture partners from influence. Bain has created an acquisition company called Pangea to act as the buyer of Toshiba Memory Corporation.

 

 

The owners of Pangea are:

  • Bain Capital. Responsible for the construction and a future IPO.
  • Toshiba. Reinvesting a significant amount of the proceedings into the new company.
  • Hoya Corporation: A supplier to Toshiba and seen as important in the eyes of the Japanse authorities.
  • SK Hynix: A direct competitor to Toshiba that is prevented from buying TMC directly.
  • A US Consortium: Four of the largest customers of NAND flash in the world. Dell, Apple, Kingston and Seagate.

There is now sufficient information to get an overview of the ownership structure of Pangea. The construction is built around three share classes that isolate some of the companies from direct influence:

  • Common Shares – with full voting rights
  • Convertible Preferred Stock – Likely with guaranteed dividends, liquidation rights and conversion right to common shares under IPO and similar circumstances.
  • Unconvertible Preferred Stock – Without liquidation and conversion rights. But a significant hedging investment if your company is buying flash.
  • An ownership structure that would satisfy the available information can be seen below:

 

 

Effectively Bain has constructed a financial setup that will give Toshiba Corporation 1.65 Trillion Yen and let them, together with Hoya, keep control of the company on Japanese hands. Bain themselves get a massive influence for a relatively small investment, while Hynix, the largest single investor get very limitied influcence.

 

 

 

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