By Makiko Yamazaki and Kentaro Hamada
TOKYO (Reuters) - Toshiba Corp (T:6502) is looking to sell a minority stake in its core semiconductor business to Western Digital Corp (O:WDC), a source said, in a bid to dull the blow from a looming multi-billion-dollar writedown on a U.S. nuclear acquisition.
The laptops-to-engineering conglomerate, still recovering from a $1.3 billion accounting scandal, shocked investors last month by announcing cost overruns at a U.S. nuclear business it bought in 2015 which could now mean a charge against profit topping $4 billion.
Toshiba does not have many options to offset the impact of this writedown that could wipe out its shareholders' equity. Given the fact the firm is on the Tokyo Stock Exchange's watchlist, it is impossible for it to raise funds from financial markets. The spin-off of its profitable but capital-intensive chip business and a stake sale are perhaps the only ways out.
"It is true that we are discussing a spin-off of our memory chips business, but nothing has been decided," Toshiba said in a statement, after the Nikkei business daily reported the firm was considering such a move earlier on Wednesday. The chips unit generates most of the Japanese firm's operating profit.
While Toshiba did not confirm whether it was looking to sell around 20 percent in the unit to Western Digital for up to $2.7 billion as Nikkei reported, a source briefed on the matter said the two companies were in talks for a "minority stake" sale.
"Toshiba doesn't have any other options. I have an impression that this deal is their last-ditch measure," said Yasuo Sakuma, portfolio manager and executive officer at Bayview Asset Management Co.
FUNDS WELCOME TOO
Toshiba, which has been in talks with the U.S. company for a possible investment in the chip unit, could also ask funds to invest in the business that could be valued around 1 trillion yen ($8.9 billion), sources have told Reuters.
"There are several candidates for investment," one of the sources said, without giving details.
The Japanese company is aiming to complete the spinoff by the end of March, the sources said, adding Toshiba could eventually list the unit but that it would retain a majority stake because it is currently almost the only growth driver.
According to researcher IHS, Toshiba had a 20.4 percent share in the global NAND flash memory market in April-June last year in terms of revenue, ranking second after Samsung Electronics (KS:005930) which has a 34.9 percent share.
The combination of Toshiba and California-based data storage company Western Digital would create a new industry leader.
Western Digital, which operates a NAND flash memory plant in the city of Yokkaichi in Mie prefecture with Toshiba, did not immediately respond to requests for comment on the deal.
Toshiba shares closed morning trade up 3.2 percent, versus the benchmark Nikkei average (N225) that was roughly flat.
The company reported an operating profit of 78.3 billion yen from its chips and devices business over April-September 2016, accounting for 81 percent of its total operating profit.