By Makiko Yamazaki and Junko Fujita
TOKYO (Reuters) - Toshiba Corp (T:6502) said on Friday it wasn't convinced by an effort by Western Digital Corp (O:WDC) CEO Steve Milligan to win the Japanese conglomerate's backing for the U.S. tech firm's bid for Toshiba's highly prized chip unit.
The failure of the two business partners to resolve tensions comes as uncertainty spikes over the make-up of the groups bidding for the world's second-largest producer of NAND memory chips, less than a week before Toshiba is to announce a winner.
Toshiba is rushing to find a buyer for the business, which it values at $18 billion or more, to cover billions of dollars in cost overruns at its now-bankrupt U.S. nuclear business Westinghouse Electric Corp.
Western Digital has been seen by some sources as key to any successful deal as it which jointly operates a key flash memory chip plant with Toshiba in Japan.
The two firms are, however, at loggerheads over the auction, with Western Digital pursuing an international arbitration claim that Toshiba has breached the joint venture contracts by entertaining outside bids and arguing that the sale cannot proceed without its consent.
The Japan-backed consortium is competing with U.S. chipmaker Broadcom Ltd, (O:AVGO) which has partnered with U.S. private equity firm Silver Lake. Toshiba favors the Broadcom bid as it is higher and would avoid antitrust concerns triggered by Western Digital, which overlaps heavily with Toshiba on NAND chips.
Ahead of Toshiba's planned decision to pick a preferred bidder on Thursday, attention has focused on last-ditch efforts to salvage the government-Western Digital bid.
Western Digital on Wednesday proposed a consortium led by a Japanese state-backed fund, the Innovation Network Corp of Japan, and including U.S. private equity firm KKR & Co (N:KKR), sources told Reuters, declining to be identified as they were not authorized to talk to the media.
But two sources familiar with the matter said on Friday that the state-backed fund was now in talks with U.S. private equity firm Bain Capital about teaming up in a bid.
One of the sources said Bain would replace KKR as the main partner for the state-backed fund. In the previous round of bidding, Bain partnered with South Korean chipmaker SK Hynix (KS:000660).
A representative for SK Hynix declined to comment. A representative for KKR was not immediately available for comment.
Milligan and Toshiba CEO Satoshi Tsunakawa met at Toshiba headquarters on Friday afternoon.
"Toshiba listened to Western Digital's thinking, but our concerns about the prospects of success for a deal were not wiped out," a Toshiba spokeswoman said.
A Western Digital spokeswoman confirmed that the meeting took place, but declined to comment further.
A senior Toshiba executive said after the meeting that even a minority stake by Western Digital would make it hard to clear antitrust review.
In its bid, Western Digital initially sought a majority but has agreed to limit its stake to 19.9 percent to appease the government, the sources said.
The bid price is still short of Toshiba's threshold 2 trillion yen ($18 billion) and lower than Broadcom's offer of 2.2 trillion yen, they said.