Toshiba may spin off or sell its NAND flash business after accounting scandal, cost overruns

By Joel Hruska

Toshiba is investigating radical options for restructuring in the wake of its 2015 accounting scandal and a massive write-down on the value of its US nuclear business. The company has confirmed that it is evaluating splitting its semiconductor business with longtime partner Western Digital, and that any entity created in a deal between the two tech companies would be eligible for an IPO at some future date. Toshiba’s troubles date back to 2015, when the company announced it had lied about its earnings over the previous seven years and had overstated its total profits by $1.2 billion, along with improperly valuing inventory by an unspecified amounts. The scandal drove two of the company’s former CEOs and eight other executives to resign their positions and wiped $8 billion off Toshiba’s market value.

The other problem Toshiba is dealing with is the disastrous performance of its nuclear division. In 2006, Toshiba bought Westinghouse for $5.4 billion but later had to write down $2.3 billion of the expense. Last year, Westinghouse purchased CB&I Stone & Webster, a US-based firm specializing in nuclear projects. Despite the fact that Westinghouse paid just $229 million for the firm, Toshiba is facing a write-down of up to six billion dollars related to its acquisition of the company. The CB&I Stone & Webster acquisition was a calculated risk on Toshiba’s part that it would recoup its investment based on projects that were already in the pipeline. Repeated delays and problems with said projects have slashed their estimated value while driving up costs.

Fukushima Daiichi punched a hole in Toshiba’s nuclear ambitions.

“Westinghouse has found that the cost to complete the U.S. projects will far surpass the original estimates, mainly due to increases in key project parameters, resulting in far lower asset value than originally determined,” a Toshiba spokesperson told the New York Times at the end of last month. Toshiba’s worldwide nuclear ambitions have run into multiple roadblocks over the past decade, thanks to cheap natural gas in the United States and the Fukushima disaster killing Japanese interest in nuclear power.

All of this brings us to the company’s NAND flash factories, which are fairly potent cash cows that also have high operating costs. No modern NAND flash manufacturer can afford to pause its migration to 3D NAND or lower process nodes, which means there’s a continuous cycle of reinvestment in plants and equipment. Current thinking is that Toshiba could sell a 20% interest in its NAND flash business in exchange for $1.77- $2.65 billion in cash. That cash would provide a much-needed injection of capital and balance sheet improvement that could buoy the company while it deals with its structural problems and evaluates the future of its various enterprises.

Pairing up with Western Digital also makes sense. Toshiba and WD already operate a NAND flash plant in Yokkaichi and have worked together before. The move also makes sense for Western Digital, which is facing the long-term erosion of its business to SSDs as that technology evolves and improves. Whether the company would function as a jointly-owned subsidiary or continue as a part of Toshiba is still being discussed, as is how much of its NAND business Toshiba wants to sell. Toshiba has announced it is building 64-layer NAND flash with plans to ship hardware in 2017.