Toshiba is told to fix chip spat with Western Digital

A Japanese government-led consortium has told Toshiba Corp it needs to resolve its legal dispute with Western Digital Corp before it will invest in the firm's chip unit, sources briefed on the matter said.

The consortium is seen as one of the strongest suitors for the unit - the world's No. 2 producer of NAND chips - as it would automatically have the government's stamp of approval, but it is worried about legal risks if the spat is not settled, the sources said.

The group includes a state-backed fund, the Innovation Network Corp of Japan (INCJ), the Development Bank of Japan (DBJ), as well as U.S. private equity firm Bain Capital. South Korean chipmaker SK Hynix Inc and the core banking unit of the Mitsubishi UFJ Financial Group Inc are set to provide financing.

Their bid is expected to exceed the minimum of 2 trillion yen ($18 billion) sought by Toshiba, one of the sources said.

Western Digital, which jointly operates Toshiba's main chip plant, has sought a court injunction to prevent its partner from selling its chip business without the U.S. firm's consent.

But Toshiba wants to complete the deal as quickly as possible to help cover billions of dollars in cost overruns at its now-bankrupt Westinghouse nuclear unit and to dig itself out negative shareholders' equity that could lead to a delisting.

The conglomerate had set its sights on choosing a preferred bidder at a board meeting on Wednesday, separate sources familiar with the matter said. It wants to reach a definitive agreement by June 28, the day of its annual shareholders meeting.

But the sources added that the condition set by the government-led group could prompt Toshiba to postpone the vote.

The sources declined to be identified as discussions concerning the sale were confidential. INCJ, DBJ and SK Hynix and MUFG declined to comment. A representative for Bain was not immediately available for comment.

Toshiba said it would not comment on the auction process. Western Digital reiterated a June 15 statement by Chief Executive Steve Milligan in which he said that Toshiba was violating contractual rights and had left the U.S. firm no choice but to pursue legal action.

Ball with Western Digital

The condition that Western Digital, which has tabled its own bid, de facto drop its legal action could pave the way for the California-based firm to join the government-led consortium.

"The ball is now in Western Digital' s court," said one of the sources who had direct knowledge of the matter.

But Western Digital is reluctant to join the group in its current form due to worries that sensitive technologies belonging to its joint venture with Toshiba could be leaked to rival SK Hynix, sources said.

It regards their technology in NAND semiconductors, which provide long-term data storage, as on par with that of industry leader Samsung Electronics. By contrast, SK Hynix is weak in NAND although strong in DRAM chips, which help electronic devices perform multiple tasks at once.

The government-led consortium's bid has been orchestrated in large part by the trade ministry which wants to keep the chip unit under domestic control.

It has been seeking to counter a 2.2 trillion yen from U.S. chipmaker Broadcom and its partner, U.S. private equity firm Silver Lake.

Foxconn, the world's largest contract electronics maker, is also a suitor. Formally known as Hon Hai Precision Industry, the Taiwanese firm is leading a consortium that includes Apple Inc and computing giant Dell Inc [DI.UL].

(REUTERS)