By Makiko Yamazaki
TOKYO (Reuters) - Toshiba Corp's board on Friday approved plans to make its core memory chip business a separate company and seek outside investment in it, aiming to avoid being crippled by an upcoming multi-billion dollar writedown for its U.S. nuclear business.
The drastic step will be only one of many tough choices the Japanese conglomerate must take, as the proceeds are set to cover just part of the charge for cost overruns at a newly acquired U.S. power plant construction business - a figure that local media has put at 680 billion yen (4.8 billion pounds).
Toshiba's memory chip business - the world's biggest NAND flash memory producer after Samsung Electronics (LON:0593xq) - is its crown jewel, accounting for the bulk of its operating profit.
Toshiba is looking to sell roughly 20 percent for more than 200 billion yen and potential investors include private equity firms, business partner Western Digital Corp (NASDAQ:WDC) and the government-backed Development Bank of Japan, sources have said.
It is rushing to complete the sale by the end of the financial year in March as failure to do so will likely mean that shareholder equity - whittled down to just $3 billion in the wake of a 2015 accounting scandal - would be wiped out by the charge.
Mark Newman, an analyst at Sanford Bernstein in Hong Kong, said the move would only be a short-term band-aid.
"The NAND business is the only one with value, as it makes up all of the semi-conductor profits, which comprise 75 percent of the overall company's profit. I won't be surprised if they sell another 20 percent in a few years time and then another 20 percent."
It also remains to be seen how well the sale process will go given Toshiba's tight timeframe to get it done and caution on the part of potential investors.
"Partnering with Toshiba could be risky due to uncertainties over its nuclear business," said an official at a global private equity firm.
"Chip businesses are highly cyclical and need massive capital investment. Funds are cautious because they have had their fingers burnt with chip investments in the past," said the official, who was not authorised to speak to media and declined to be identified.
A raft of private equity funds, including Silver Lake and Permira, have signed non-disclosure agreements with Toshiba, sources said.
While Western Digital, which operates a NAND plant in Japan with Toshiba, may seem like a natural buyer of a large stake in the chip business, a sale might be difficult to pull off before March as it would likely invite a review by anti-trust regulators.
FOXCONN INTEREST?
Toshiba will hold a news conference at 4.30 Tokyo time (0730 GMT). It may give an estimate of the size of the writedown, a person familiar with the matter has said.
The final figure for the writedown will be announced on Feb. 14 when it reports third-quarter results.
Toshiba estimates the value of its memory chip business at 1-1.5 trillion yen ($9-13 billion), a person with direct knowledge of the matter has told Reuters.
The business generated sales of 845 billion yen and operating profit of 110 billion yen in the past financial year.
Toshiba Chief Executive Satoshi Tsunakawa recently told the company's main creditors of its plans, a person with direct knowledge of the matter has said, adding that Toshiba is also looking at selling other businesses.
Its main banks have agreed to not call in some loans early for now even as recent downgrades of the firm's credit ratings violate some provisions in debt agreements, people with direct knowledge of the matter have said.
Japanese business weekly Toyo Keizai reported that Terry Gou, chief executive of Foxconn, the world's largest contract electronics maker, is interested in either taking a stake in or buying some of Toshiba's businesses.
Foxconn, formally known as Hon Hai Precision Industry Co, is interested in Toshiba's broadcasting equipment business, the weekly said, adding high definition imaging technology for TV networks is likely to be the focus of its interest.
A representative for Foxconn had no immediate comment.