It’s been a busy week for Apple. While CEO Tim Cook showed off the 10th anniversary iPhone in California, his lieutenants worked half a world away on what may become the company’s largest deal ever.
Apple is in talks to invest about US$3bn in Toshiba’s memory chips business as part of a consortium led by Bain Capital, according to people familiar with the matter.
Apple plans to take an equity stake that could total 16% in a group that also includes Dell, Seagate Technology and SK Hynix, they said.
That support convinced Toshiba to sign a memorandum of understanding with Bain and work toward a final agreement this month, they said. If the agreement is completed, it may exceed Apple’s largest deal yet, the $3bn acquisition of Beats Electronics.
Apple is interested in the chip unit because of the strategic importance of flash memory. The compact chips are essential for its iPhones and iPods, storing every photo, video clip and animoji. Only a handful of companies make the highest-end technology and the dominant player is Samsung Electronics. The last thing Cook wants is to end up dependent on his arch rival in smartphones, so he wants Toshiba’s chips unit to stay healthy.
“A lot of this is opportunism,” says Mark Newman, an analyst with Sanford C Bernstein in Hong Kong. “If Apple is involved, then they have a little bit more say in the industry structure.”
Toshiba has been in negotiations since January to sell off its chips business and pay for a losses in its nuclear business. The sale has been held up because Western Digital, a joint venture partner with Toshiba in the chips business, has argued it has rights in any sale and filed for arbitration in the US. Toshiba needs to raise the money by March to avoid seeing its shares delisted from the Tokyo Stock Exchange. Toshiba declined to comment.
Opposed Western Digital
Apple is helping swing the deal away from Western Digital, one of the Cupertino, California company’s own suppliers that tried to buy the chips unit with KKR & Co. Apple has actively opposed Western Digital’s bid, in part because it would concentrate power within the chip industry, the people said. Apple spokesman Josh Rosenstock declined to comment.
John Connaughton, Bain’s co-managing partner, confirmed the firm is working with Apple and Dell, without disclosing details of the negotiations.
“There’s a lot of people that want Toshiba Memory to be an independent company,” he said in an interview on Bloomberg Television. “The management is really aligned with us and supports us because we will be that party that retains that independence.”
Bain issued a statement identifying Seagate and Kingston Technology as partners as well. The US firm said it would honour Western Digital’s contractual terms but that the company is “over-reaching” in asserting its rights.
Nand flash memory chips are among the most expensive components of the iPhone and the market for the chips is concentrated in the hands of just six suppliers, with Samsung holding more than 40%. For the iPhone maker, Toshiba’s 18% falling completely into the hands of another supplier would further narrow its options and make pricing negotiations tougher. Western Digital had a 13% slice of the market last year and SK Hynix accounted for an similar portion, according to researcher International Data Corp.
Led in Japan by MD Yuji Sugimoto, Bain worked through spring and early summer to assemble a bid with two state-backed funds, Innovation Network of Japan and Development Bank of Japan. The consortium offered about ¥2.1 trillion ($19.1bn) and was selected as the preferred bidder in June. But as Western Digital and CEO Milligan became increasingly vocal in its opposition, INCJ and DBJ decided to pull back.
Japan’s ministry of economy, trade & industry then encouraged Toshiba to accept the rival offer from KKR and Western Digital, people familiar with the matter said at the time, in an effort to end the litigation and reach a deal quickly. But Yasuo Naruke, head of Toshiba’s chips business, resisted the proposal, the people said.
In the meantime, Sugimoto worked to win Apple’s support. The US company had originally backed an offer from Terry Gou, the Taiwanese billionaire whose Foxconn Technology Group makes iPhones. But by this month, it was clear that Japanese opposition to Foxconn was insurmountable. Apple and Cook signed on with Bain.
The precise composition of the Bain group is still in flux and may change, the people said. There is no guarantee they will be able to reach a final agreement with Toshiba.
The investment would give Apple “better control of a critical supply chain component”, said Nehal Chokshi, the MD of consumer and enterprise technology at Maxim Group who rates Apple stock a buy.
After Toshiba announced its MOU with Bain, Western Digital said it is “disappointed” and that it would continue to pursue arbitration claims. Toshiba said Thursday it “regrets” that Western Digital is persistently overstating its rights and that the Japanese company is committed to completing the chip sale by March.
“Western Digital was playing a very aggressive legal campaign against their partner, arguably taking advantage of Toshiba’s financial distress,” says Newman, “and one part of this is just Apple stepping in and saying, ‘Look, that’s enough’.” — Reported by Peter Elstrom and Sam Kim, with assistance from Alex Sherman, Ian King, Kiel Porter and Jing Cao, (c) 2017 Bloomberg LP