+Comment Broadcom may be better placed financially to bid for Toshiba's memory business because Western Digital is burdened with debt from its $16bn SanDisk acquisition. Knowing this, WD is setting up a contract law barrage.
Bloomberg, quoting unnamed sources, says Broadcom has lined up financing from three Japanese banks: Mizuho Financial Group Inc., Sumitomo Mitsui Financial Group and Mitsubishi UFJ Financial Group. They will provide about $15bn in loans, while Silver Lake will add $3bn in convertible debt making up its $18bn (¥2 trillion) bid.
The outlet reports WD saying it had cash and cash equivalents of $5.2bn in January, with $6.2bn "liquidity available" and a net debt position of about $800m, which we think roughly means $10.5bn. To outbid Broadcom it could need $20-25bn, which it doesn't have.
On that basis, saying it has to agree to the sale of Toshiba's JV holding or it will block the sale looks a logical tactic. Outgunned financially, it's lining up its contract law artillery. Can it legally do that?
WD joint venture rights
Stifel analyst and MD Aaron Rakers has been looking at the Toshiba-WDC flash foundry joint venture – Flash Ventures – operating agreement and identified a few sections indicating that WD does have legitimate concerns and rights about the sale of Toshiba's part:
- No action shall be taken by or on behalf of the Company in connection with any of the following matters without the prior unanimous written approval of the members, each acting through the Executive Officers appointed by it:
- (iv) any merger, consolidation or other business combination to which the Company or any of its Subsidiaries is a party, or any other transaction to which the Company is a party resulting in a Change of Control of the Company
- (v) any sale, lease, pledge, assignment or other disposition of assets of the Company in an amount (in terms of consideration to be received by the Company) in excess of ¥5,000,000 in one transaction or a series of related transactions, other than as expressly provided for in the FF Operative Documents or as set forth in the most recently approved Business Plan
- (viii) with respect to the Company or any of its Subsidiaries, (A) the voluntary commencement of any proceeding or the voluntary filing of any petition seeking relief under Japanese or foreign bankruptcy, insolvency, receivership or similar law, (B) the consent to the institution of, or the failure to contest in a timely and appropriate manner, any involuntary proceeding or any involuntary filing of any petition of the type described in clause (A) above
Rakers says the operating agreement gives the companies the ability to dissolve the joint venture at any time between 1 April, 2017, and 31 March, 2018. He writes: "We believe there is a significant chance that Western Digital will block the sale of the JV as the company may use the JV's operating contract to acquire the unit at a discount price."
As a reminder, WD owns 49.9 per cent of Flash Ventures and is committed to purchase 50 per cent of its NAND Flash wafer output.
We think that WD wants to own the JV outright and not share it with Broadcom. It doesn't want to see Hon Hai (Foxconn) or SK Hynix taking over Toshiba's share either.
That means, if WD can block the JV sale to rival companies, that Toshiba will have to recoup the money it would have made from the Hon Hai and Broadcom bids by having Japanese state-backed agencies invest in it. Lots of lawyers and financial people will be poring over documents and proposals and hitting their telephones and email over the next few days. ®