Toshiba should sell stake in ex-chip unit at IPO, says HK activist fund in letter

TOKYO (Reuters) – A Hong Kong-based activist investor in Toshiba Corp (6502.T) has asked the Japanese conglomerate to sell its entire stake in Kioxia Holdings when the flash memory chip firm is listed in an IPO that could raise up to $32 billion, according to a letter reviewed by Reuters.

Argyle Street Management Ltd, a hedge fund with over $1.5 billion under management, sent the letter to CEO Nobuaki Kurumatani in late March urging the company to sell its 40% stake and distribute proceeds back to shareholders.

The initial public offering of Kioxia, the world’s second-largest flash memory chip maker, could be Japan’s biggest listing this year, sources have said.

Market valuation could reach $32 billion, domestic media reports have estimated. However, the coronavirus outbreak has created uncertainty over the timing of the IPO and valuation of the shares, given that the market for flash memory chips, used in smartphones and data storage servers, is highly volatile.

When contacted by Reuters, Toshiba said nothing has been decided. A Kioxia spokesman said the company was not in a position to comment on what Toshiba planned to do.

Toshiba sold its flash memory chips unit to a consortium led by U.S. private equity firm Bain Capital for $18 billion in 2018 to plug a huge financial hole left by the bankruptcy of its U.S. nuclear business.

The deal saw Toshiba reinvest in the unit and together with optical products maker Hoya Corp (7741.T), Japanese firms took more than 50% – a keen wish of the Japanese government, sources had said at the time.

Toshiba has explained to Argyle that one of the reasons for the reinvestment was the requirement by Japanese regulators for a significant portion of Kioxia shares to be held by domestic parties, according to the letter.

But this aspect should not be a factor in Toshiba’s decision whether to divest or not, the letter argued. “Doing otherwise would unnecessarily penalise shareholders.”

A source familier with the matter said Toshiba has tacit understanding with the government that it should not sell down the stake until an IPO, but has no such restrictions after the listing.

The fund also said Toshiba has “substantial headroom” for 400 billion yen ($3.7 billion) in share buybacks, on top of the 700 billion yen repurchase completed late last year, citing gains from the Kioxia stake sale and others as potential sources.

Toshiba has been facing pressure from activist funds agitating for changes since the company sold 600 billion yen of stock to dozens of foreign hedge funds in late 2017. Nearly 70% of its shareholders are non-Japanese.

Bowing to the pressure, the 144-year-old comapny last year overhauled its board to include non-Japanese directors for the first time in 80 years.

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