Bain says Western Digital legal protest threatens Toshiba JV

 24 Oct 2017 - 23:07

Bain says Western Digital legal protest threatens Toshiba JV
A man walking past the logo of Toshiba Corp displayed at the company headquarters in Tokyo on February 14, 2017 (AFP / Behrouz Mehri)

By Ian King / Bloomberg

The Bain Capital-led consortium that’s buying Toshiba Corp.’s chip unit warned Western Digital Corp. to give up attempts to overturn the deal and settle its legal claims if it wants the relationship to continue.

The Bain group agreed to pay about $18 billion for the business, but Western Digital is seeking to block the sale in U.S. courts. The San Jose, California-based company contends that as Toshiba’s joint venture partner it has contractual rights to approve any transaction for the business.

In his first public interview about the dispute, David Gross-Loh, the Bain managing director behind the deal, forcefully disputed those claims. He said Western Digital’s legal challenge is based on a misrepresentation of its rights and that the deal is structured so there is no threat to its business. He warned however that Western Digital’s access to flash memory products is at risk because of its aggressive legal tactics.

“Time is not the friend of Western Digital,” said Gross-Loh. “With the right moves to repair that relationship, it’s not beyond repair.”

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The Bain consortium, which includes Apple Inc., Seagate Technology Plc, SK Hynix Inc. and Toshiba itself, prepared a document about the transaction with frequently asked questions and answers, which was reviewed by Bloomberg News. Nine of the 16 questions address the Western Digital relationship. One states the company “is either misreading or misrepresenting” its agreement with Toshiba; another says that the companies three joint venture arrangements expire in 2021, 2025 and 2029, indicating Western Digital may not have rights to flash-memory production after that final date.

By going public with its characterization of Western Digital’s position, the Bain group is putting pressure on the U.S. company’s management to negotiate a truce and remove a key obstacle to closing the sale. Toshiba needs a deal done by the end of next March in order to bring in cash to cover billions of dollars in losses in its U.S. nuclear business -- or see its shares delisted from the Tokyo Stock Exchange. The transaction also requires government antitrust approvals.

In the run up to announcement of the deal, Western Digital reiterated its legal arguments, warning that legal proceedings could drag on till 2019 and put the deal in jeopardy. It also plans to seek an injunction to block the sale. The two sides are currently in binding arbitration talks.

“Absent any willingness on Toshiba’s part to resolve this matter with its JV partner in a constructive manner, we intend to continue our successful legal efforts into the binding arbitration process,” John Hueston, counsel for Western Digital and partner at Hueston Hennigan, said last month. The company declined further comment.

Western Digital became Toshiba’s partner when it bought SanDisk last year and the U.S. company gets chips from Japanese factories that it helped equip. That arrangement is part of the three joint venture agreements between the two, which are at the heart of their disagreement.

“When they bought SanDisk maybe they didn’t fully understand what it was they were buying,” said Bain’s Gross-Loh. “We did a massive study of this to really understand the essence of these contracts. It’s equipment that’s been bought and financed. If both sides don’t want to come up with a new JV, it’s gone.”

Gross-Loh stressed his comments refer to what could happen in the future at the expiration of the current agreements in 2021, 2025 and 2029.

Toshiba owns the plants, the process technology and employs the workers in those factories, he said. When the existing agreements expire, the joint-venture equipment will be outmoded and worthless. It’s therefore essential, in such a fast moving industry, for new investments and new agreements to be forged, Gross-Loh said.

“That’s the reason why time is not Western Digital’s friend,” he said.

Toshiba memory has already expressed its intention to go ahead alone with an investment in a new plant called Fab 6. That’s not something the terms of their agreement allow, according to Western Digital, which has said that it’s contributed much more than equipment financing to their joint efforts.

Western Digital, which will report quarterly earnings later this week, needs the supply of chips to help it make products that are replacing its magnetic storage-based hard disk drives in the computer industry.

It’s fought all along to exclude competitors - such as SK Hynix and Seagate - from ownership of Toshiba chip production. Bain’s Gross-Loh said those two companies have agreed not to participate in the management of the new company and not seek to buy further stakes in it for a decade. All of the consortium members want to keep Toshiba memory healthy and independent, he said. Any delay in closing the deal and investing in new production only helps Samsung Electronics Co., the largest maker of the chips.

“The only one that’s happy about this is Samsung right now,” he said.