By Takaya Yamaguchi and Makiko Yamazaki
TOKYO (Reuters) -Toshiba Corp's shares rose 7% on Thursday on a report of a potential Japanese-led $19 billion bid that could lead to foreign activist investors being bought out after years of tension.
A consortium led by private equity firm Japan Industrial Partners has been given preferred status in a second round of bidding, two sources familiar with the matter told Reuters.
Japan Industrial Partners has contacted multiple Japanese firms, sources have said, about a potential bid for Toshiba (OTC:TOSYY) which Kyodo news agency reported could be worth 2.8 trillion yen, representing a premium of 26% to Wednesday's closing price.
Of these, Orix (NYSE:IX) Corp plans to enter the consortium, while Chubu Electric Power Co is also considering joining, said another source familiar with the matter.
Japan Industrial Partners declined to comment. An Orix spokesperson said it has been in talks with Japan Industrial Partners, while Chubu Electric has declined to comment.
Shares in Toshiba, which declined to comment on the Kyodo report, closed up 7.4%, marking their biggest one-day gain in more than a year. They have risen about 17% this year.
"It looks like people bought into the idea that there won't be more bad news," said Mitsushige Akino, chief fund manager at Ichiyoshi Asset Management.
Bloomberg News reported that Baring Private Equity Asia and CVC Capital Partners are also considering joining the consortium. Baring and CVC declined to comment.
Japan Industrial Partners has been involved in previous corporate carve-outs and spin-offs from Japanese conglomerates. It bought Olympus Corp's camera business last year and Sony (NYSE:SONY) Group's laptop computer business in 2014.
Toshiba, once a well-known conglomerate, has been weakened by accounting and governance scandals.
Turnaround attempts have been overshadowed in recent years by discord between management and Toshiba's many activist shareholders over the direction of the company, with several large foreign funds pushing it to consider private equity bids.
Tensions peaked last year when a shareholder-commissioned investigation concluded that management had colluded with Japan's trade ministry, which sees Toshiba's nuclear and defence technology as a strategic asset, to block overseas investors from gaining influence at its 2020 shareholder meeting.
"The only way to get rid of the activists is to buy them out," said Travis Lundy, a Quiddity Advisors analyst who publishes on the Smartkarma platform.
It was not immediately clear how many bids Toshiba was seriously considering but Lundy said the contest is probably an open race between Japan Industrial Partners and state-backed Japan Investment Corp.
The two had previously joined forces to bid for Toshiba but have since gone their separate ways due to disagreements about the proposal, sources have said.
The Japan Industrial Partners-led consortium will put up about 1 trillion yen in equity, with the rest likely to come from bank loans, Kyodo said, adding that financing talks were underway and the offer value could change.
One of the sources told Reuters that the consortium is yet to narrow down details, including valuation and financing.
Japan Investment Corp has been in talks with private equity firm Bain Capital, one of several overseas funds that passed the first round of bidding, one of the sources said. Bain has declined to comment.
MBK Partners is also in talks with the state-backed fund, another source has said.
($1=146.8300 yen)