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Brain Storming on Paper

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22-year old PE Firm takes 74-year old Public Firm Private in Largest Transaction of 2023

The story of Toshiba's historic buyout is marked by a journey of resilience and strategic maneuvering. The history of the well-known Japanese conglomerate dates to 1939, when Tokyo Denki (founded in 1890) and Shibaura Seisaku-Sho (established in 1875) merged to form Tokyo Denki, which was renamed to Toshiba Corporation as late as in 1984. With origins in the manufacturing of light bulbs and telegraphic equipment, the company has since then adjusted to the rapid advancement of technology while broadly diversifying its portfolio of business activities that span electronics, infrastructure, energy, and building solutions, semiconductors, and water management. From 2004-14, the company reported annual revenues of more than $50 billion with a 10-year CAGR of 1.44%.


However, troubles brewed within the company's core, spanning from 2015 to 2017. In 2015, revelations of accounting malpractices rocked the corporate landscape, as Toshiba admitted to overstating profits by a staggering ¥230 billion ($1.59 billion). The following year, a strategic move to acquire Westinghouse Electric, a US-based nuclear power plant construction company, resulted in a cascade of financial woes. Westinghouse's Chapter 11 filing in early 2017 left Toshiba grappling with a staggering $6 billion in liabilities, prompting auditors to raise red flags over the company's negative net worth. Amidst these challenges, Toshiba made the decision to offload its prized chip business, the world's second-largest producer of NAND chips, to Bain Capital for $18 billion. Yet, this move was not without complexities, as disputes with Western Digital, Toshiba's partner in the chip joint venture, added further turbulence to the divestiture. 


In the wake of instability, a critical turning point occurred in November 2017 when Toshiba executed an emergency capital raise, securing $5.4 billion with Goldman Sachs to avert the threat of delisting. This move, which attracted 30 overseas investors including influential activist shareholders like Elliott Management, Third Point, and Farallon, underscored the company's determination to navigate its challenges. By June 2018, Toshiba made significant strides towards stability by settling a contentious dispute with Western Digital. Spearheaded by a consortium led by Bain Capital and featuring key industry players such as SK Hynix, Apple, Dell, Seagate, and Kingston, Toshiba repurchased 40% of its chip unit, signaling a strategic realignment.


Soon after, in 2020-2021, the company witnessed heightened scrutiny from activist investors, culminating in a series of events that shed light on governance issues within the company. In July 2020, tensions came to a head as five director candidates nominated by activist shareholders were voted down at the Annual General Meeting (AGM). The proceedings revealed unsettling discrepancies, with more than 1,000 postal voting forms remaining uncounted, raising questions about the integrity of the process. Subsequent revelations by Sumitomo Mitsui Trust Bank uncovered systemic failures in vote counting at AGMs of client firms over the past two decades, casting a shadow of doubt over Toshiba's governance practices. March 2021 witnessed a pivotal moment as shareholders voted to authorize an independent investigation into the events surrounding the 2020 AGM, signaling a growing demand for transparency and accountability within the company. By June 2021, a damning report surfaced, exposing collusion between Toshiba and Japan's trade ministry to impede overseas investors from exerting influence at the 2020 AGM. This revelation underscored the complex interplay between corporate interests and governmental intervention. 


As Toshiba navigated through the complexities of corporate restructuring and shareholder pressure, in April 2021, CVC Capital Partners, a Luxembourg-based private equity firm, capitalized on Toshiba's distress with an unsolicited $21 billion buyout bid. However, this move was swiftly met with internal upheaval as the CEO, a former CVC employee, resigned just a week later, prompting CVC to withdraw its offer. Undeterred, Toshiba explored alternative paths, considering proposals to split the company into three separate entities, and later into two, between November 2021 and February 2022. However, shareholder dissent prevailed, with investors voting against the proposed spinoff during the March 2022 Annual General Meeting (AGM). In response to mounting pressure and heightened scrutiny, Toshiba formed a special committee in April 2022 to assess potential buyout opportunities.


A consortium led by the low-profile Japan Industrial Partners (JIP) emerged as a prominent contender in the buyout bids. In June 2022, amidst eight buyout proposals, four were selected for consideration, including bids from Bain Capital, CVC Capital, Brookfield Asset Management, and the JIP Consortium. Notably, the JIP Consortium comprised Japan Industrial Partners (JIP), a private equity firm established in 2002, alongside Orix Corp, Chubu Electric Power, Rohm, and sixteen other stakeholders. However, the dynamics within the consortium soon shifted, leading to a split between Japan Industrial Partners (JIP) and the state-backed Japan Investment Corp (JIC). Despite this internal restructuring, the JIP Consortium remained steadfast in its pursuit, culminating in the submission of a final bid on February 8, 2023, marking a critical juncture in Toshiba's journey towards potential privatization.


The tender offer, fixed at ¥4,620 per share, represented a 9.7% premium on the closing stock price on the offering date, contingent upon a minimum acceptance level of 66.7%. With an aggregate bidding value approximating ¥2.2 trillion ($15.2 billion), the aim was to transition Toshiba into a wholly owned subsidiary of the consortium. Based on FQ3 (CQ4) 2022 EBITDA and market cap, and February 7, 2023 share price, the trading EV/EBITDA ratio stood at 10.21x while the offer EV/EBITDA ratio stood at 10.55x. The deal was structured with 45% equity and 55% debt components. Equity participation amounted to ¥1 trillion, with Japan Industrial Partners (JIP), Rohm, Orix, and Chubu Electric Power jointly contributing. This Equity/EBITDA ratio stood at 4.79x. 


On the debt side, JIP proposed nearly ¥1.2 trillion, comprising a ¥300 billion amortizing portion and a ¥900 billion bullet piece. Financing was predominantly sourced from Sumitomo Mitsui Banking Corporation (SMBC) (¥441 billion) and Mizuho ( ¥394 billion), accounting for over two-thirds of the total financing, with Sumitomo Mitsui Trust Bank (¥188 billion), MUFG (¥137 billion), and Aozora (¥38 billion) also participating. The Debt/EBITDA ratio was 5.75x. Debt was segmented into three tranches: senior, mezzanine, and junior, each carrying different interest rates based on the Tokyo Interbank Offered Rate (TIBOR) plus the margin of 300 bps, 350 bps, and 300 bps, respectively.


Ultimately, Japan Industrial Partners secured a 78.65% stake in Toshiba, amounting to ¥1.73 trillion ($13.5 billion). As a result of the transaction, Toshiba Corporation shares were delisted on December 20, 2023. Overall, it's clear that the acquisition of Toshiba Corporation culminates from a history of internal mismanagement and external influences. It's notable how the Japanese market presented favorable conditions for investors, offering a promising outlook. Looking ahead, Japan Industrial Partners has retained CEO Taro Shimada, indicating a potential strategy to relist Toshiba in the coming years, signaling a new chapter in the company's journey under private ownership. Chairman Akihiro Watanabe has said that the industrial conglomerate will need not only to improve its efficiency and profitability, but also to make large investments, including mergers and acquisitions (M&As) with software and AI companies. 


Sources: Reuters (1, 2, 3), Nikkei Asia, BSPEC, Goldman Sachs, IFR


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