CVC/Toshiba: buyout would test Japan’s good intentions

For CVC, a mooted buyout bid for Toshiba would be opportunistic. For Nobuaki Kurumatani, chief executive of the Japanese conglomerate, it could be opportune. An acquisition would draw public attention away from damaging battles with activists.

The Luxembourg-based private equity group has offered to buy a majority stake valuing Toshiba at nearly 2.3tn yen ($21bn). That implies a 30 per cent premium to Tuesday’s closing price. Shares rose 18 per cent on Wednesday.

Toshiba, with a $16bn undisturbed equity value, has long traded below the sum of its parts and at a discount to local peers. The shares have a price-to-book ratio of under 1.8 times, lower than local peers like Sony that also struggle with a conglomerate stigma.

The business, once known for the quality of its consumer electronics, is now a tired conglomerate laden down with legacy units. Toshiba’s recent past has been uneven. Controversies include an accounting scandal and US nuclear unit Westinghouse entering Chapter 11 protection in 2017.

Toshiba holds a 40 per cent stake in Kioxia, a chip group. That shareholding alone could be worth a big chunk of Toshiba’s market capitalisation. Analysts suggest Kioxia might be valued at more than $36bn in its expected listing.

The biggest share of Toshiba’s revenues, about 40 per cent, comes from two units. The first, a devices business, makes chip equipment and hard drives. The second is active in railway infrastructure and generators. Valuing the duo on an enterprise value-to-sales basis produces a figure of about $16bn for devices and $21bn for infrastructure

Kurumatani should welcome any distraction. Shareholders have become increasingly critical about governance and capital allocation. The critics are led by Singapore-based activist Effissimo, the group’s largest investor.

Last month shareholders voted in favour of Effissimo’s proposal for an independent investigation into management’s conduct during last year’s annual meeting. This was tainted by allegations of voting irregularities. Kurumatani’s reappointment last year was a close call. He garnered just 58 per cent support after a contentious vote.

But a buyout and break-up would be difficult. Japanese takeover law is unfriendly to acquirers. Sensitive technology like chips and nuclear power means a foreign purchase would need government approval.

For the Japanese government, CVC’s interest in Toshiba is bittersweet. Ministers have seen activists as a force for good in improving shareholder returns. But activism can also trigger break-up bids that irk some voters. CVC’s approach has potential to stand as a test case of Japan’s real priorities.

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