A $15 Billion Buyout? Take the Money and Run

(Bloomberg Opinion) -- Toshiba Corp. finally looks like it has a path forward with one of Japan’s biggest-ever leveraged buyouts on the table. Even if shareholders don’t seem too enthused about the terms, best to take your money and call it a day. 

After months of uncertainty and bad news, the storied conglomerate accepted an offer from a consortium of 17 Japanese firms and six domestic banks, led by private equity shop Japan Industrial Partners Inc., or JIP, for a 2 trillion yen ($15.1 billion) buyout. The emergence of clarity in a long-running drama between global hedge funds and an iconic firm pushed the stock price up over 4% in the immediate aftermath. Since then, the shares have bumbled along.

Shareholders nickle-and-diming their way out at this point isn’t worth it. Investors deeply involved with the company, like Elliott Management Corp., will likely be able to make this a profitable trade. They can take solace in the fact that corporate governance and activism worked (kind of), the Japanese firm’s misdeeds came to the fore, and solution is in sight. That’s still commendable given Toshiba’s checkered past. From accounting issues to a near brush with bankruptcy, a report that put the Japanese firm’s efforts to block shareholders rights on display, and a $5.4 billion rescue by foreign investors to avoid a delisting, the company’s misdeeds have dragged on and on. But heavyweight hedge funds could only go so far.  

It won’t get much better. Closer reading of the late March press releases announcing the tender offer show the disappointing deal is really the only one available. The notice was corrected to justify the deep discount. Initially, it stated the tender offer price was considered the “best price that can be expected,” noting that it’s hard to say whether it will reach a level that can be clearly recommended to shareholders. The language was then amended to say it was a “reasonable exit opportunity” for investors to recover their capital. Not quite a ringing endorsement. 

To create more confusion, the board didn’t recommend the offer outright, as is often customary to show conviction. It just supported the deal. Given the uncertain macro environment, rising interest rates and a weak leveraged buyout loan market, the special board committee(1)wanted shareholders to decide for themselves, rather than “pre-judging.” It doesn’t see things changing for the foreseeable future. In theory, a big rally could buoy Toshiba’s stock, putting the firm in a position to negotiate a higher price. Preserving the option is tactful but seems like wishful thinking right now. Regardless, it’s unclear why they went into the nuance because recommended, non-competitive bids rarely fail in Japan. In the past decade, there have been over 600 tender offers, of which only 25 were terminated. That’s close to a 4% chance. But then again, it Toshiba — anything could happen. 

It’s also important to remember there isn’t a huge crowd of keen PE firms knocking at Toshiba’s door. JIP and its partners didn’t just show up to rescue it — they were courted. After establishing that going private was the only effective option, the firm went looking for domestic sponsors, presumably those who could offset the foreign interest and draw in local equity partners. Toshiba approached JIP through a financial adviser in April last year to participate in the bidding process, after the likes of Bain Capital, KKR & Co. and CVC Capital Partners had done the rounds. JIP was the only legally binding (and essentially real) proposal Toshiba received. And, through the negotiations, the price fell from 5,500 yen per share in September to 4,620 yen per share as of the offer.

The one thorny issue is what happens when a formal proposal is launched in July after regulatory approvals are completed and conditions met. The deal could potentially stumble if a minimum two-thirds of the shares aren’t tendered — a required threshold for the transaction to go through. Unless an investor thought there was going to be a sudden rally in the price or a better unsolicited bid high enough to make the additional palaver worth it, there aren’t many reasons to stand in the way. Days before the announcement, one of Toshiba’s largest shareholders, 3D Investment Partners Ltd., cut its stake from 7.2% to 4.9%.

The board has left itself wiggle room. While the company isn’t allowed to solicit competitive or counter bids, if one to come its way, Toshiba could assess it under certain conditions. A breakup with JIP et alwould cost 2 billion yen, so any offer would have to take this fee into account and make a new deal worth it. 

There are other niggling issues, too. Toshiba will need to take on a heap of debt: If JIP raises around 1 trillion yen of borrowings to execute the tender offer, Toshiba’s net debt will rise to nearly 1.3 trillion yen, according to S&P Global Ratings. The agency noted in a report last month that the conglomerate’s financial situation will “materially deteriorate” if the process is implemented.(2)With few prospects of business improving, servicing that debt will create a whole new burden for the firm.

All told, this is the best price and only buyer Toshiba is going to get in the shortest period of time. Any other offers are likely to draw the process out for a lot longer — and adding years to this drama is the last thing investors need, especially as Toshiba’s financial health shows few signs of improvement. Investors may as well take what they can get while there’s an option available lest JIP and friends have buyer’s remorse.

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(1) Established by Toshiba's board of directors in April 2022, composed of company's independent outside directors.

(2) Toshiba would be obliged to repay a portion of debt that the special purpose company raises to purchase the shares, according to S&P Global Ratings.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Anjani Trivedi is a Bloomberg Opinion columnist. She covers industrials including policies and firms in the machinery, automobile, electric vehicle and battery sectors across Asia Pacific. Previously, she was a columnist for the Wall Street Journal’s Heard on the Street and a finance & markets reporter for the paper. Prior to that, she was an investment banker in New York and London

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