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Toshiba considers fallback plan

Monday, November 13, 2017

Toshiba is considering boosting its capital by 600 billion yen ($5.3 billion) to ensure its stock will not be delisted at the end of the current fiscal year, but raising such a large sum may not be easy given the company's dire condition.

The embattled Japanese conglomerate forecasts that it will end the current year through March at 750 billion yen in negative equity if nothing is done. This would result in a second consecutive year of liabilities in excess of assets, triggering a condition for delisting at the Tokyo Stock Exchange.

After months of struggle, the company secured in late September a deal to sell its semiconductor memory unit to a consortium of Japanese, U.S. and South Korean entities. If the sale is consummated by the end of March, Toshiba's net worth would turn positive at 330 billion yen. But the deal is contingent on the sale of the unit, Toshiba Memory, getting the green light from competition watchdogs in various countries, a process that could easily take beyond March.

Fallback plan

This is why Toshiba is considering a capital increase. If the company can raise 600 billion yen, that probably would be enough to push its net worth into positive territory, when combined with several hundred billion yen in reduced tax liabilities. The company has opted to write off more than 600 billion yen in losses stemming from its disastrous U.S. nuclear power operations in installments. By writing off a large chunk this year, instead, it would be able to claim a large loss and reduce tax liabilities.

Toshiba appears to be examining the possibility of selling new shares to foreign investors through a private placement or issuing preferred shares without voting rights. A public offering does not seem to be on the table at the moment. The company is working toward making its decision as early as this month.

Hard sell

Meanwhile, many in the stock market remain skeptical that Toshiba will be able to find enough investors who are willing to buy into a company scrambling for its survival. "If the company thinks it can raise capital in the stock market, it did not need to sell the memory unit," one investor noted.

Under the best-case scenario, where the company is able to complete the sale of the memory unit and raise 600 billion yen through a new-share issuance, Toshiba's equity capital will shoot up beyond the 1 trillion yen mark.

Such a large buffer would ease concerns over the company's finances and make it easier to pursue growth strategies centering on infrastructure and information technology-related businesses.

Conversely, however, Toshiba's business foundation would be shattered if the company fails to complete the sale of the unit and raise fresh capital, since this spells stock delisting.

Market reaction

Toshiba shares dropped as much as 8% to 288 yen at one point Friday to hit the lowest level in three months. The fact that 600 billion yen is equivalent to more than 40% of Toshiba's market capitalization as of Thursday probably prompted shareholders to sell to avoid a dramatic dilution in share value. But some investors came in to pick up Toshiba shares at low prices, betting on the increased likelihood of avoiding delisting. Toshiba shares ended the day at 297, down 5% from Thursday.

By: DocMemory
Copyright 2017 CST, Inc. All Rights Reserved

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