TOKYO Western Digital Corp (WDC.O) has sought international arbitration to stop partner Toshiba Corp (6502.T) from selling its chips arm without its consent, potentially derailing a much-needed capital injection for the Japanese conglomerate.
California-based Western Digital is a long-standing joint venture partner and runs Toshiba’s main semiconductor plant in Japan. It has sought to bid for the Toshiba chips business, but is not seen as the front-runner, given its bid has been trumped by Taiwan’s Foxconn (2317.TW) and U.S. chipmaker Broadcom Ltd (AVGO.O), a source familiar with the matter has said.
In the early hours of Monday, Western Digital said it had initiated arbitration procedures with the International Chamber of Commerce International Court of Arbitration, demanding Toshiba reverse a move to put its joint venture assets into a hived out entity – Toshiba Memory – and that it stop an all-out sale without consent from Western Digital unit SanDisk.
Toshiba argues that under their joint venture contract, neither party can block a change of control by the other partner. It argues Western Digital itself acquired the joint venture interest when it bought SanDisk, and never sought or received Toshiba’s approval.
Western Digital, however, claims that Toshiba’s move breaches their contract.
“Toshiba’s attempt to spin out its joint venture interests into an affiliate and then sell that affiliate is explicitly prohibited without SanDisk’s consent,” Western Digital chief executive officer Steve Milligan said in a statement.
“Seeking relief through mandatory arbitration was not our first choice in trying to resolve this matter. However, all of our other efforts to achieve a resolution to date have been unsuccessful, and so we believe legal action is now a necessary next step.”
Toshiba, battered by billions of dollars in cost overruns at its now bankrupt U.S. nuclear business, is desperately trying to accelerate the sale of its semiconductor business – the world’s second biggest NAND flash memory chip producer.
An arbitration process could drag out for months or longer, putting Toshiba’s presence on the Tokyo Stock Exchange in jeopardy, as it needs cash from the chip unit sale to bulk up its shareholder equity and stay listed.
The dispute could also derail Toshiba’s financing plans, as it hopes to offer the stake in its memory chip unit as collateral for new loans from major lenders, a measure that the lenders say also requires Western Digital’s approval.
Toshiba, which values the unit at least 2 trillion yen, believes that a consortium of U.S. private equity firm KKR & Co LP (KKR.N) and Japanese government-backed investors would be the most feasible buyer for the chips business, sources with direct knowledge said last week.
The Japanese government has proposed that Western Digital join their consortium as a minority investor, but the U.S. company has said it needs to take control of the unit in order to be fully in charge of operations, separate sources have said.
(Reporting by Makiko Yamazaki; Editing by Nick Zieminski)