Toshiba sets up special committee to evaluate privatization: market disagreements remain

Beijing time, April 14th morning news, it was reported that Toshiba's announcement last week indicated that the company seemed to change its development direction, thereby pushing up the company's stock price.

The Japanese conglomerate will set up a special committee to "determine the privatization offer that is best suited for our diverse shareholders."

Toshiba will also suspend its corporate spin-off plans, temporarily shelve plans to sell non-core businesses, and announce a new business roadmap before its shareholders' meeting in June.

Investors have bought the stock on the prospect of a privatization, pushing up Toshiba's share price. But some analysts have also maintained a more cautious stance: while a privatization of Toshiba is now a possibility, it is far from a certainty.

“Toshiba is now more realistic than before,” said Mio Kato, an analyst at LightStream Research. “It needs government approval, but it’s not clear whether the government will approve it.”

Toshiba's management and the Japanese government have been in a dramatic standoff with shareholders who have been frustrated by years of scandals and financial mismanagement.

While Toshiba executives wanted to split the company into three, then two, shareholders rejected the split last month, and privatization appears to be the best solution for activist investors who hold a large stake and believe it would bring them a huge financial gain.

A Toshiba spokesman said the company has set up a special committee to interact with potential investors and sponsors to evaluate candidate strategies, but has not yet determined specific options, including privatization. The spokesman said Toshiba will continue to win the trust of shareholders.

But it seems that Toshiba has no easy choice. Inaction cannot appease shareholders, and the plan to split in two has been rejected. Privatization also faces a major obstacle: it depends on whether the government approves it. Because Toshiba has high-end technology for nuclear power plants, it is listed by the Japanese government as a company related to national security under the provisions of Japan's Foreign Transactions and Foreign Trade Act.

In February, then-Toshiba CEO Satoshi Tsunakawa said privatization was a mistake because it had many flaws, saying Toshiba would sell sensitive businesses and lose many orders from utilities and local governments.

Naoki Fujiwara, chief fund manager at Shinkin Asset Management in Tokyo, said the success of any acquisition ultimately depends on who is initiating the acquisition.

“Foreign funds may join forces with Japanese funds,” he said. “That would make things much simpler.”

Toshiba was in talks with financial institutions about a takeover plan led by domestic investors, the Nikkei reported in late March, boosting the company's shares. A Toshiba spokesman said at the time that the company had not made any decision.

A few days later, another potential buyer emerged, this time from overseas. Effissimo Capital Management, Toshiba's largest shareholder with a 9.9% stake, said it would sell all of its shares if Bain Capital made an offer for two-thirds or more of Toshiba's shares. Bain Capital said it had not yet made any decision on the offer.

“A Japanese entity has to be involved,” said Justin Tang, head of Asia research at United First Partners in Singapore. “Nuclear assets and defense assets have to be protected.”

Justin Tang is optimistic about the prospect of privatization. He said: "The only option to turn around the company's predicament is now clear."

But LightStream's Mio Kato said he is not confident about this.

“I don’t think privatization is the most likely outcome,” he said. “I think it’s about a 30 percent chance.”

The different opinions from the outside world also reflect the series of uncertainties that Toshiba has faced in the past seven years.

It all started with an accounting scandal in 2015 that hurt Toshiba’s profits and triggered a company-wide restructuring. Then came the failure of its big-ticket push into U.S. nuclear power and a $6.3 billion write-down that put the company on the brink of delisting. Toshiba was forced to sell off its crown jewel chip business and sell large chunks of its stock to activist investors who had taken too big a stake.

When Effissimo tried to install the company's co-founder and other candidates as Toshiba directors in 2020, it was opposed by shareholders. Questions were raised about the voting results, and Effissimo also proposed an independent investigation and won a key shareholder vote last year. Last year's investigation report showed that Toshiba management teamed up with government allies to manipulate the voting results. Toshiba's four directors were "deeply disturbed" by this.

Last November, Toshiba proposed to split the company into three, but it was quickly opposed by shareholders. In February this year, the company announced that it had canceled its original plan and proposed to split the company into three, but it was rejected again at the special shareholders' meeting on March 24. Another major shareholder proposed to reconsider other options such as selling, but it was also rejected.

Toshiba executives are currently adapting to changing circumstances, said Atsushi Osanai, a professor at Waseda University’s business school.

“All proposals put forward by management so far are stopgap measures to appease shareholders one day,” he said. “As long as management maintains its current retreat from shareholders, no option, including privatization, will be approved.”

But Justin Tang of United First Partners warned that Toshiba's directors had no room to maneuver. He believed that no matter how difficult privatization might be, it was the only option now.

"The board had no choice," he said.