Farallon calls on Toshiba to reconsider PE buyout

Farallon and Effissimo Capital Management, which together own about 15% of Toshiba and last year instigated the removal of several senior executives following a corporate governance scandal, have both indicated they will vote against plans to hive off the devices and semiconductor business. Proxy advisors Institutional Shareholder Services (ISS) and Glass Lewis are also against the move.

Toshiba “should carefully evaluate – through a comprehensive solicitation process – private equity interest in acquiring the company to put an end to the spiral of mistrust and reposition the company for the future,” Farallon said in a statement.

It argues that the spinoff – to be voted on at an extraordinary general meeting later this month – is premature because privatisation was never adequately explored. Moreover, Toshiba’s new management has admitted they were not involved in conceiving the spinoff plan. It advocates that shareholders vote in favour of a second proposal to continue a review of all alternatives.

Farallon added that privatisation would not only maximise value for shareholders, but it is also “the only solution for Toshiba to fix its governance, capital allocation issues, and the deep mistrust with its shareholders.”

It was reported in February, but subsequently denied by both sides, that The Blackstone Group approached Toshiba about a take-private. A week later, CEO Satoshi Tsunakawa resigned.

Tsunakawa was brought in following the departure of Nobuaki Kurumatani last April. Kurumatani previously served as Japan president at CVC Capital Partners, and towards the end of his troubled tenure, the private equity firm made a tentative USD 20bn offer for Toshiba. It then stepped back, awaiting guidance as to whether privatisation was desirable.

Within weeks, Toshiba shareholders had defied the board to approve an investigation into alleged misbehaviour at the company’s annual general meeting last year. The probe found that management had colluded with government to rig voting, prompting the removal of the four senior executives.

Toshiba’s troubles date back to the bankruptcy of its Westinghouse nuclear power unit in 2017. This led to various disposals – including Toshiba Memory Corporation (TMC), the prized flash memory business, which went to a Bain Capital-led consortium – and a widely distributed share issue that allowed activist investors to build up significant positions.

In the fallout from the governance scandal last year, Toshiba embarked on a strategic review. One of the options, a three-way split between devices, semiconductors, and infrastructure, is said to have been opposed by investors that wanted the company to explore fully a private equity-led privatisation. Ultimately, Toshiba put forward the two-way spinoff proposal.

Making its own case against the proposal last week, Effissimo argued that the separation would damage Toshiba’s medium to long-term corporate value. It also highlighted the failure to restore the trust of shareholders, as well as insufficient management resources and the recent departure of executives who were to be held accountable for the separation.

Toshiba posted JPY 3.05trn in sales for the 12 months ended March 2021, down from JPY 3.38trn in 2020 and JPY 4.04trn in 2017. Net income came to JPY 113.9bn compared to losses of JPY 114.6bn and JPY 965.7bn in 2020 and 2017, respectively.

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• Topics
• North Asia
• Buyouts
• Technology
• Infrastructure
• Japan
• Farallon Capital
• The Blackstone Group
• CVC Capital Partners