Toshiba warns Western Digital in second letter on chip sale

[TOKYO] Toshiba Corp fired another legal missive at manufacturing partner Western Digital Corp, warning the US company to stop its "harassment" as the Japanese company tries to sell its flash memory business.

Toshiba sent a letter to Western Digital's chief legal officer on Wednesday forcefully reasserting its right to auction off the business in which the two companies hold certain assets together. The letter, from Toshiba's lawyer at Morrison & Foerster, said the joint venture only owns equipment - and nothing more - and that the value of those joint assets is less than 5 percent of the Japanese company's chip business.

The Tokyo-based company wants to sell the chips business to offset losses in its nuclear unit and avoid having its shares delisted from the Tokyo Stock Exchange. The US company has sought to block the sale on concerns the operations may fall into the hands of competitors, but hasn't been able to match the price offered by other bidders. Western Digital Chief Executive Officer Steve Milligan plans to present a revised offer as soon as this week, a person familiar with the matter said last week.

"Toshiba encourages Western Digital to redirect the considerable effort that it has put into disrupting Toshiba's sale process into more productive channels," Louise Stoupe, a partner at Morrison & Foerster, wrote in the letter. Western Digital didn't respond to a request for comment.

Toshiba shares rose 3.1 per cent at 9.16 am in Tokyo trading Thursday, while Western Digital was little changed in the US.

"What continues to amaze us is not the fact that Toshiba continues to advance higher as this is the kind of market we are in at the moment," Amir Anvarzadeh, head of Japanese equity sales at BGC Partners Ltd. in Singapore, wrote in a note. "What is astonishing is the fact that WDC shareholders have not flinched at all." The legal disagreement centers on the change of control provisions in the joint venture contract. In preparation for the divestment, Toshiba transferred ownership of the unit to a separate legal entity. Western Digital has argued that Toshiba needed to seek its permission before making that move, and that to resolve the dispute the two parties should enter arbitration. Toshiba responded by moving the joint venture assets back to the parent , a step the Japanese company says resolves any grounds for dispute.

In the letter, it also stressed the joint venture assets "are worth millions and not billions." The document goes on to detail in a series of bullet points what belongs to the venture and what belongs to its own subsidiary, Toshiba Memory Corp., based in the city of Yokkaichi: The JV companies do not own land at Yokkaichi - TMC does.

The JV companies do not own the fabs or cleanrooms that sit on that property - TMC does.

The JV companies do not own intellectual property or perform research and development - TMC does.

The JV companies do not employ the hundreds of line engineers who actually manufacture NAND Flash - TMC does. In fact, the JV companies have no employees at all.

The Japanese company, which in 1989 invented NAND flash memory now used to store information in devices ranging from smartphones to data centers, said the joint venture is just a financing vehicle. The agreement entitles Western Digital to purchase wafers from Toshiba at cost and "nothing more." If the joint venture assets are indeed worth less than 5 percent of the total of Toshiba's memory business, that would likely value them at less than $1 billion. The offers for the whole business have been about $20 billion.

Toshiba narrowed the list of potential buyers to four bids as of a May 19 deadline for second-round offers. Broadcom Ltd. and a group led by KKR & Co. had emerged as the two leading bidders, people familiar with the matter said at the time. Other suitors are Taiwan's Hon Hai Precision Industry Co and South Korea's SK Hynix Inc.

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