Toshiba’s battle for survival

published 7 July 2017

Japanese giant Toshiba needs to sell assets to plug the holes in its balance sheet. Time for a corporate clear out? Alice Grhns reports.

"Six months into its financial crisis, Toshiba is shaping up as the Sistine Chapel of corporate catastrophes: you have to lie on your back to appreciate its scale," says Leo Lewis in the Financial Times. In May, the Japanese engineering and electronics conglomerate estimated losses for the year to March 2017 would be $6.5bn. Its auditor has refused to sign off on its accounts. It has been told it will be downgraded to the second section of the Tokyo Stock Exchange, and could be delisted. Analysts say it could go bankrupt. "Yet the company strikes investors as less worried or repentant than its former expressions of regret suggest." At the annual general meeting last month, its top executives' latest "bow of apology" lasted just five seconds "about half a second for every billion dollars it lost in the most recent financial year".

To make matters worse, Toshiba's best hope of financial salvation is under threat due to lawsuits between it and a key business ally, the data-storage firm Western Digital. Toshiba wants to sell its memory-chip business, worth $18bn, to plug the holes caused by accounting scandals and the huge losses arising from its nuclear business, says Jacky Wong in The Wall Street Journal. But Western Digital which inherited a chip joint venture with Toshiba when it acquired SanDisk insists any deal needs its approval and last month filed a lawsuit to stymie the sale. Rather than engaging with Western Digital, Toshiba countersued, asking a Tokyo court to stop its ally's interference and demanded $1bn in damages. Given the firm needs to get the sale done quickly, "amping up a legal fight with its long-time joint-venture partner seems an odd way to get things done".

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Toshiba also hopes to raise $2.3bn by floating or selling Landis+Gyr, one of the world's biggest makers of electricity meters, in which it owns a 60% stake, as part of the "scramble to avert financial collapse", says Andrew Ward in the Financial Times. Yet it should go further and "add its cardboard box of bits and bobs to the corporate garage sale", says Shelly Banjo on Bloomberg Gadfly. The firm owns shares in "a hodgepodge of 37 companies, involved in everything from vacuum cleaners to airport souvenir shops" that could generate more than $3.3bn. By acting now, it would have a chance of selling the stakes at a premium "instead of caving to activist investors who are already circling". Selling off the non-core holdings will also unshackle these firms "that no longer benefit from what was once a strong parent company". After all, "it's not like the brand name Toshiba stokes goodwill these days".

"In theory, Worldpay should be a bidder, rather than a target," says Neil Unmack on Breakingviews. The firm has a dominant position processing in-store card payments in the UK, and its growing global e-commerce business spans 146 countries. It handled 15 billion transactions in 2016, revenue rose 15% to £4.5bn and pre-tax profits leapt to £264m from £19m. Indeed, it's "hard to see how having a US owner would be an advantage" here, says Lionel Laurent on Bloomberg Gadfly. "Britain is a fairly specific market, fuelled by debit-card spending." There are few savings to be made from a cross-border tie-up.

However, Worldpay's US division is struggling to grow, notes Unmack. Worldpay's sales here are a fifth of Vantiv's and barely rising. A deal with a larger player "can deliver much-needed scale in a sector ripe for consolidation". And the fast-growing e-commerce business for multinationals is an "obvious draw" for Vantiv, which will aim to pool spending and cut overlap, adds Laurent. Still, "any pay-off there could take years to achieve" and Worldpay is pricey, on 30 times forecast earnings. The buyer will have its work cut out "justifying a steep bid premium".

"For a FTSE 100 company to lose one vote on pay is embarrassing. To lose two would look like its board has learned nothing and takes its shareholders for mugs," says Nils Pratley in The Guardian. For Burberry, the luxury goods firm, "the danger is real". In 2014, 53% of its shareholders voted against a remuneration report that granted £15m in shares to Christopher Bailey, the chief executive at the time. Now two big proxy-voting agencies are advising investors to vote against this year's report. The board is "lobbying shareholders furiously for support", but perhaps it's time instead to reconsider "Burberry's record of showering its executives with vast sums".

The Financial Reporting Council (FRC), the UK's accounting regulator, has announced a probe into PwC's audit of BT's Italian division, where alleged fraud may have cost the telecoms firm £530m. Yet the investigation looks like "another example of the way the FRC, whose board is packed with accounting bigwigs, seems to frame its investigations in the narrowest possible way", says Patrick Hosking in The Times. BT's chief executive Gavin Patterson says the wrongdoing may go back ten years but the FRC is only looking at PwC's role during the past three years. "This kind of selectiveness dents confidence in the FRC's enforcement processes." Accounting firms clearly like the "agreeably gentle way their profession is policed", but don't be surprised if politicians "start to lose patience".

Alice grew up in Stockholm and studied at the University of the Arts London, where she gained a first-class BA in Journalism. She has written for several publications in Stockholm and London, and joined MoneyWeek in 2017.