Apple in talks for Toshiba chip business

Apple is wading into the middle of the battle for Toshiba Corp’s memory chip business.

The iPhone maker is in talks with Bain Capital to bid for the Tokyo-based company’s unit, in competition with a group that includes KKR & Co and Western Digital Corp, according to people familiar with the matter.

Bain had previously submitted a 2.1 trillion yen ($19 billion) offer with another group of backers that included state-backed Innovation Network Corp of Japan and Development Bank of Japan.

Apple depends on flash memory from Toshiba in its iPhones and iPods, and wants a continued supply so it’s not dependent on rival Samsung Electronics Co.

“There are supply shortages of that type of memory,” Michael Walkley, an analyst with Canaccord Genuity.

“They’re always looking to work closely with key suppliers and lock in long-term supply agreements.”

Toshiba has been in negotiations for months to sell off its chips business and pay for a disastrous move into the US nuclear business.

The company needs to raise the money by March to avoid seeing its shares delisted from the Tokyo Stock Exchange.

The auction has been complicated by legal action from Western Digital, which has argued it should have a say in any sale because of its partnership with Toshiba in the chips business.

In recent weeks, Japan’s powerful Ministry of Economy, Trade and Industry has encouraged Toshiba to accept the offer from the Western Digital consortium, the people said, in an effort to end the litigation and reach a deal quickly.

Top Toshiba executives and its deal advisers are resisting the current offer, arguing it doesn’t do enough to protect the interests of the chips unit or the parent, the people said.

Yasuo Naruke, head of the chips business, is an outspoken critic of the Western Digital proposal, the people said, while the METI bureau involved in the talks is led by Tatsuya Terazawa.

Apple didn’t respond to emails and phone calls seeking comment. Kaori Hiraki, Toshiba’s spokeswoman, declined to comment on details of the deal negotiations. Japanese broadcaster NHK previously reported Apple’s talks with Bain.

Toshiba shares fell 1% in Tokyo trading, while Apple’s stock was little changed in the US.

It’s not clear exactly how Apple would support Bain’s bid. Rather than take an equity stake, the US company may provide money by pre-paying for chip supplies in the future, a standard practice in the industry that Apple has used in the past to give suppliers financial support.

That would be simpler in some ways for Apple and allow it to avoid hurting relationships with other suppliers, like Samsung and SK Hynix.

The Western Digital consortium is offering about 2 trillion yen, less than the original Bain bid, a person familiar with the matter has said.

Western Digital would loan money for the initial purchase with rights to take a minority equity stake in the future, the people said.

INCJ and the Development Bank of Japan would also participate in that bid.

METI’s support for Western Digital may be because the government officials don’t understand several finer contractual issues, said one of the people.

For example, Western Digital has agreed to limit the amount of debt that it will convert into equity in the chips business – a condition METI wants to avoid antitrust problems – this person said.

But it won’t agree to cap the overall amount of equity it can acquire through other means, like from KKR, the person said.

Toshiba has requested such an aggregate cap, but Western Digital has resisted that term.

In the past week, Toshiba’s banks have stepped up pressure to reach final terms by Thursday, so that it can complete the sale by March, people familiar with the matter have said.

Western Digital Chief Executive Officer Steve Milligan also returned to Japan to work on the deal, they said. But Toshiba and Western Digital remain at odds over several points, and reaching final terms by Thursday looks close to impossible, said one of the people.

About 10 reporters staked out Toshiba’s headquarters Thursday morning as the board meeting began. Five television cameras were set up outside on the rainy August day.

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Apple in talks for Toshiba chip business