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Apple and SK Hynix agree Toshiba terms: Bain to grab chip arm

Looks like WDC is scuppered apart from legal blocks

By Chris Mellor

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+Comment Big flash chip buyer Apple and Korean flash fabber SK Hynix have agreed terms and committed to their Bain-led consortium's buy of Toshiba's flash chip interests.

This leaves rival bidder WDC out in the cold, facing partnership with competitor SK Hynix and rival Seagate in its flash foundries and dealing with a multi-party group over foundry investments going forward.

The Bain Capital-led group is bidding to buy the Toshiba Memory Corporation (TMC) business and includes Dell, Kingston Technology, Seagate, and various Japanese companies, such as the Hoya Group, as well as SK Hynix – eight members in total.

There are also two Japanese state-backed INCJ and DBF funds which might invest in the future.

Hoya makes parts for flash chip devices and would have a 9.9 per cent ownership (and voting rights). Toshiba will have a 40.2 per cent ownership and voting rights.

Dell, Apple and Kingston plus Seagate need flash chip supplies. Seagate, which could contribute up to up to $1.25bn, said it hoped to gain a long-term chip supply agreement, meaning flash fab output. These four firms would not have voting rights in TMC.

To speed regulatory approval, neither Toshiba nor SK Hynix would have access to proprietary TMC information going forward, and would have less than 15 per cent voting rights for 10 years.

SK Hynix issued a statement saying it would invest ¥395bn (4 trillion won, $3.6bn) in the consortium’s estimated ¥2 trillion ($18bn) of total investment. The Bain-led consortium will hold 49.9 per cent stake in TMC, while Toshiba will hold 40.2 per cent and Japan’s Hoya Corp will own 9.9 per cent.

SK Hynix plans to finance ¥129bn of its total ¥395bn via convertible bonds that could allow it to take an equity stake of up to 15 per cent in the future. The remaining ¥266bn is to be put in a fund established by Bain Capital as a limited partner, which would help the Company enjoy capital gains when the TMC is listed.

Bloomberg reports Apple, which was delaying its commitment, has agreed terms with Bain Capital in the TMC bid.

However Reuters reports a news conference to announce the deal was cancelled because the eight Bain consortium members couldn't agree what to say or whether to say anything.

WDC is seeking an injunction to stop the deal with an international arbitration court. Toshiba needs the deal finished and done, with regulatory approval, by March 2018 to avoid Tokyo stock exchange delisting.

This has all come about because of company-killing-sized losses from Toshiba's US nuclear power station business.

+RegComment

Currently Toshiba and WDC partner in a set of flash foundry joint ventures, and share the foundry development expenses as well as each receiving a share of the chips made by the foundry facilities.

What WDC is facing – after an acrimonious, bruising and emotional negotiation period with Toshiba – is finding that the single partner, Toshiba, is being replaced by Toshiba plus rival SK Hynix, rival Seagate, and rival Kingston Technology together with Hoya and Bain Capital itself.

It will be helping to make chips for its competitors, bad enough, and be partly reliant on them for for foundry development costs, which is worse.

This is a terrible outcome for WDC. The IT industry often sees "co-opetition" between a couple of vendors, but co-opetition on this scale is surely unwieldy, unworkable, and hitherto unseen. The SK Hynix, Seagate and Kingston trio would welcome, we assume, WDC's market position being weakened.

WDC must be wondering whether it can even co-operate at all in such a seemingly ridiculous multi-party joint-venture. If it can gain a legally bullet-proof injunction from the arbitration court then that could force Toshiba to abandon the Bain deal and, at last, negotiate solely with WDC.

No pressure on WDC's lawyers then... ®

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