INTRODUCTION
On 23rd March 2023, Toshiba Group’s board of directors approved a JPY2tn ($15.1bn) cash offer from a consortium led by Japan Industrial Partners Inc (JIP) to delist the company from the market. If successful, the operation would represent the largest take-private deal in Japan.
After a long period of speculations, Toshiba seems close to the end of an eight-year saga featuring accounting scandals, bankruptcies, and the fire-sale of its most valuable branch, the flash memory business now known as Kioxia. Will this deal represent the right opportunity for Toshiba to solve all its problems? How could the consortium raise enough financing to support this turnaround, which looks everything apart from granted? That’s what we will try to analyze and answer in this article.
First, we will start with an analysis of Toshiba’s leading businesses and a quick outline of the main problems the company has been facing recently. Then, we will see the rationale behind the acquisition before assessing the deal structure and whether the acquisition price represents the fair value of Toshiba.
INDUSTRY OVERVIEW
As one of the world’s largest electronic and electrical equipment manufacturers, Toshiba operates through six main strategic segments: Electronic Devices & Storage Solutions (24% of net sales), which deals with the production and sale of different electronic devices, from integrated circuits to semiconductors; Infrastructure Systems (18%) which includes transportation systems for other purposes (e.g., water, sewage, roads, elevators, lighting, and transportation); Energy Systems & Solutions (16%) which offers different types of energy power generation, ranging from hydro-electric to nuclear and thermal; Building Solutions (17%); Retail & Printing Solutions (13%), providing point-of-sale systems and machines; Digital Solutions (6%), and Others (6%).
Given its presence across different strategic sectors, Toshiba is an essential player in the global economy. However, over the last decade, Toshiba has suffered from various scandals dramatically impacting its performance. Starting from 2015, when the company disclosed accounting malpractices that resulted in a pretax profit overstatement of 230bn yen ($2bn) over seven years, Toshiba has been on the radar of prosecutors and investors. Some company divisions have been sold to help the company face financial troubles following Westinghouse’s bankruptcy in 2017 (e.g., the sale of Toshiba Memory to Bain Capital in June 2018). Accounting irregularities emerged again in January 2020, negatively impacting the conglomerate’s reputation. The group has been a clear private equity target over the last years, as taking the company private represents the best solution to help Toshiba repair its many problems.
Even though Toshiba is historically a leader in different industries, the group has recently reported a significant decline in operating income. On February 14th, Toshiba reported a fall of almost 90% in its quarterly operating profit (JPY5.3bn for the October-December quarter, far below the consensus estimate of JPY38bn). It also has downwardly reviewed its forecasts for the second time since November.
There are many drivers underlying these business troubles. First, the hard-drive business was heavily hit by a drastic weakening of demand as manufacturers and enterprises curbed spending in the face of a recession. Then, the group recorded a JPY10.2bn impairment charge for its printing business as the subsidiary’s share price fell. Additionally, Toshiba’s reputation worsened even further as its chief operating officer, Goro Yanase, resigned after auditors found that he violated company rules in submitting entertainment expenses.
Toshiba is clearly in need of an urgent transformation. If successful, the take-private deal would represent the right opportunity to restart by creating a stable management structure and allowing the conglomerate to gain its historic leadership position in different industries.
Company Overviews
Japan Industrial Partners Inc (JIP)
Japan Industrial Partners Inc (JIP) is a private equity firm that specializes in acquiring and revitalizing underperforming or non-core businesses from large corporations. The firm was founded in 2002 and is based in Tokyo, Japan.
JIP’s primary focus is on acquiring and restructuring businesses in sectors such as information technology, electronics, manufacturing, and consumer goods. The firm’s approach involves identifying businesses with strong potential for growth and profitability, implementing operational improvements, and providing strategic guidance to unlock value and drive sustainable success.
JIP’s portfolio includes businesses in various industries, such as information technology, electronics, machinery, chemicals, and consumer goods. Some of the notable businesses that JIP has acquired and revitalized include:
- Sony’s personal computer business (VAIO Corporation)
- NEC’s personal computer business (NEC Personal Computers Ltd.)
- Hitachi’s diagnostic imaging business (Hitachi Healthcare Corporation)
- Olympus’ imaging business (OM Digital Solutions Corporation)
JIP manages several funds with a total capital of over 300 billion yen ($2.7 billion) and has a reputation for being a reliable partner for Japanese corporates.
Suzuki Motor Corp.
Headquartered in Hamamatsu, Suzuki Motor Corp. was founded in 1909 by Michio Suzuki as Suzuki Loom Works, initially producing weaving looms for Japan’s silk industry. The company diversified into automobile manufacturing in 1937, and its first prototype, the Suzulight, debuted in 1954.
Suzuki’s strategic focus on small, fuel-efficient vehicles and motorcycles enabled it to expand rapidly and establish a strong international presence. Today, Suzuki is the third-largest automotive manufacturers in terms of market share in Japan. Key areas of Suzuki’s business include automobiles, motorcycles, marine products, power products and financial services.
In recent years, Suzuki has prioritized sustainable growth and innovation. The company is investing in research and development for electric vehicles, fuel cell technology, and advanced driver assistance systems to remain at the forefront of the automotive industry.
Suzuki closed 2022 with ¥4.1 trillion in sales ($31.8 billion) in sales and has a workforce of over 68,000 employees worldwide. The company’s financial performance has been stable, with a return on equity (ROE) of 9.2% and a return on assets (ROA) of 4.9%. Suzuki Motor Corp. is listed on the Tokyo Stock Exchange.
ROHM Co., Ltd.
Headquartered in Kyoto, ROHM Co., Ltd. was founded in 1958 by Kenichiro Sato as Toyo Electronics Industry Corporation. ROHM’s core business is focused on the design, production, and sales of integrated circuits (ICs), semiconductors, and other electronic components. The company’s diverse product lineup includes power management ICs, sensors, microcontrollers, optoelectronics, and wireless communication modules.
Key segments of ROHM’s business include:
- Automotive: ROHM offers a range of automotive-grade semiconductors and electronic components, such as power management ICs, sensors, and microcontrollers
- Industrial equipment: The company provides solutions for factory automation, robotics, and power management systems
- Consumer electronics
- Telecommunications infrastructure
ROHM closed the last fiscal year with ¥523 billion ($4 billion) in sales and has a workforce of over 23,000 employees worldwide. The company’s financial performance has been stable, with a return on equity (ROE) of 6.2% and a return on assets (ROA) of 5.3%. ROHM Co., Ltd. is listed on the Tokyo Stock Exchange.
DEAL RATIONALE
The 12-member board accepted the proposal of JIP, citing that it is expected to strengthen Toshiba’s corporate value and making it Japan’s biggest ever delisting deal. This decision marks an important milestone for the company, which was struggling to improve its governance by going private for quite some time after their first crisis in 2015 caused by the resurfacing of their accounting misconduct. Thus, the main aim and hope behind this deal is that it will help the company create a stable management structure and take the decision-making power away from the overseas activist investors. As a result, it is not surprising that many M&A bankers believe that after the completion of the deal, the company will probably go through significant restructuring and even divest some of its non-core units. The next question that naturally comes up is why JIP was selected while other significant bidders such as CVC Capital Partners, Bain Capital, and Brookfield Asset Management, were not? First of all, JIP has reportedly submitted “the only complete proposal” during the entire one-year auction process. Moreover, some of the Toshiba’s businesses, such as its nuclear division, have strategic importance for Japan. Therefore, it is also very likely that the shareholders agreed to the JIP buyout, while rejecting other proposals, such as from CVC, because it is crucial to keep the company in the hands of a domestic buyer. According to experts, the goal to create an empowered governance while avoiding a takeover from foreign investors is the reason why the shareholders agreed to this offer after being very unsatisfied with the proposed price. At the same time, JIP previously made acquisitions of certain assets from such companies as Sony and Olympus, but the current transaction is the biggest the group has ever worked on. As a result, it allows JIP to elevate to a new level and potentially be exposed to such big acquisitions in the future.
DEAL STRUCTURE
Toshiba’s acquisition by Japan Industrial Partners (JIP) will be the biggest take-private deal in Japanese history and could become the third largest M&A transaction of 2023 – thus far. According to a filing issued on 23rd March 2023, TBJH Inc. which is an indirect subsidiary of JIP’s, has resolved to acquire all of the issued and outstanding shares of Toshiba Corporation through a tender offer. The purpose of the transaction is to obtain full control of Toshiba and to delist it from the Tokyo Stock Exchange to enact various value creating measures.
As of today, TBJH is fully owned by TBGP, the investment vehicle of TIP’s. By the time of the tender offer (i.e., July 2023), the ownership of TBJH will be fully transferred to TBLPS and Brick Lane Exempted Limited Partners. While the former is the investment vehicle for JIP’s domestic limited partners, the latter is the investment vehicle for JIP’s foreign target. TBLPS’ cap table is thus structured:
- 4 JIP Japanese funds
- 17 Japanese business companies
- 6 Japanese financial institutions
Brick Lane Exempted Limited Partners is thus structured:
- JIP overseas cooperative funds
- Overseas investment funds with investment from Japanese investors
- Overseas business companies
After the tender offer and eventual squeeze out of minority investors, TBLPS will hold 75% of the common shares, while Brick Lane Exempted Limited Partners will hold the remaining 25%. This indicates that a considerable portion of the funds will come from various domestic corporates, among which we can find financial services group Orix, the chipmaker Rohm, and Chubu Electric Power. These groups may be trying to set themselves up as possible acquirers of Toshiba’s non-core divisions, when these will inevitably be spun off.
The deal will reportedly be financed by borrowing up to ¥1.4tn ($10.6 bln). Considering that the deal is worth ¥2.0tn ($15 bln), this represents a leverage ratio of more than 70%. According to Bloomberg, much of the financing will come from three major domestic financial institutions, namely Sumitomo Mitsui Financial Group, Mizuho Financial Group, and Sumitomo Mitsui Trust Holdings. These three institutions have already issued letters of commitment to provide more than ¥1.2tn in debt financing, including a commitment line of ¥200bn for working capital purposes.
Although the filing states that a compensation of ¥4,620 per share will be offered by the acquirer, this figure has been revised downwards multiple times. Indeed, in early October 2022, the price per share was set at ¥5,200. Following a deeper due diligence and multiple disappointing earnings forecasts (and results), the tender offer was lowered to ¥4,710 in early February 2023 and finally to ¥4,620 in early March. This decrease in the offer price has resulted in a deterioration in investors’ interests in the transaction, so much so that the operation may even fail. Indeed, as anticipated above, the transaction will take place in the form of a tender offer. This means that, for the transaction to take place, at least 288M of the more than 433M shares outstanding need to be committed. According to several sources, it is unclear whether this threshold will be reached. In fact, a non-negligible portion of Toshiba’ shares are currently owned by foreign activist funds, which may put pressure on other shareholders to turn down the offer, which has been deemed as too low by some. Nevertheless, many shareholders may just accept a sub-optimal offer to exit an investment which has produced sub-par returns.
Authors: Giovanni Candiago, Giulia Duca, Stefano Stompanato, Giulio Pampaloni, Meric Cavus, Stefano Leone, Lilit Kalantar
Sources:
https://www.ft.com/content/13d531e2-12c1-4db9-9b35-a3cb96eeb1c1
https://www.globalsuzuki.com/ir/library/annualreport/
https://www.rohm.com/investor-relations/library/financial-report
https://www.global.toshiba/content/dam/toshiba/ww/ir/corporate/news/20230323_1.pdf
https://www.ft.com/content/158d7385-954a-42fc-93da-74cf58dabe47
Bocconi Students M&A Circle 
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