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February 15, 2017

Risk of breaking up hangs over Toshiba after 712 billion yen nuclear loss in U.S.



Toshiba Corp. has effectively fallen into a capital deficit as the result of a 712.5 billion yen ($6.3 billion) write-down for its U.S. nuclear business in its Feb. 14 outlook for the April-December 2016 period.

Suspicions of inappropriate accounting in connection with its U.S. nuclear business have arisen and its woes have increased, with the company being forced to delay its formal earnings report that it was supposed to release on Feb. 14.

The company is considering spinning off its semiconductor business and selling the majority of shares to cut debt, but by shedding its well-performing businesses, Toshiba faces the risk of breaking up.

When prodded in a news conference on Feb. 14 over the decision to invest 5.4 billion dollars (roughly 610 billion yen) in U.S. nuclear power plant manufacturer Westinghouse Electric Co. in 2006, Toshiba Corp. President Satoshi Tsunakawa evasively responded, "It is difficult to say that it was correct."

At the time of the purchase, Toshiba had expected an increase in nuclear exports to emerging countries due to increased demand for nuclear power. However, the market environment changed completely as a result of the meltdowns at Tokyo Electric Power Co.'s Fukushima No. 1 Nuclear Power Plant in March 2011. Westinghouse took orders for four nuclear reactors in 2008, but costs surged when authorities tightened regulations, and Toshiba was left having to book a 712.5 billion yen write-down in its latest forecast.

As of the end of December 2016, Toshiba's liabilities exceeded its assets by 191.2 billion yen. The biggest concern with regard to the company's survival is whether it will be able to secure capital through the sale of businesses by the end of March to recover.

At first, Toshiba had painted a scenario of spinning off its flash memory business for smartphones and other devices and unloading 19.9 percent of shares in the new company to acquire at least 200 billion yen. But under its Feb. 14 outlook, the electronics giant indicated it was now considering selling a majority stake.

"Selling all (of the shares) is a possibility," Tsunakawa said. "We're thinking flexibly."

Flash memory is the core of Toshiba's semiconductor business, accounting for about 30 percent of its sales. The reason Toshiba had sought to sell under 20 percent of shares in the business was to maintain the initiative and preserve what has been a valuable source of earnings.

However, bidding companies and investment funds had remarked that there was little appeal in a capital investment of under 20 percent. It is therefore possible that bids could remain low, leaving the company in a "crunch," according to one Toshiba source.

If Toshiba sells a bigger stake, then it will find some temporary relief through the shoring up of its capital base, but such a move would diminish its earning capacity over the long run.

Since Toshiba became embroiled in an accounting scandal in 2015, its management woes have deepened, and the company booked a consolidated net loss of 460 billion yen for the business year ending in March 2016. Toshiba sold its medical equipment unit, which had high potential, for 665.5 billion yen and also sold its white goods business in a bid to get back on its feet. But in spite of this, the company expects to see red ink for the latest business period. If it releases its semiconductor business, a jewel of the company, there will be practically nothing left to serve as Toshiba's main pillar.

In the meantime, Toshiba plans to scale back its overseas nuclear business, which was the cause of its massive losses for the latest business period. Hosokawa has suggested that the company is considering selling its shares in Westinghouse. However the global environment in which nuclear operations stand is tough, and finding a buyer remains a difficult task.


Confusion erupts as Toshiba delays earnings report



Investors focused their gaze on Toshiba Corp. on Feb. 14 as they waited for the electronics giant to announce huge losses for the April-December period in connection with its U.S. nuclear business at noon the same day. But shortly after noon, a message appeared on the company's website stating, "This is notice that we have been unable to make a disclosure at 12 o'clock today."

When there was no further announcement for some time afterward, Toshiba's shares began to slide rapidly. A news conference with Toshiba President Satoshi Tsunakawa was scheduled for 4 p.m. and reporters crowded into Toshiba's headquarters. But just before 3 p.m., when the venue was supposed to open, Toshiba announced that it would delay its earnings report. A public relations official in the lobby of the company headquarters announced in a loud voice, "We still don't know when the news conference will be held," creating a stir among the reporters assembled there.

The market was taken aback by the delay, with observers expressing surprise that the company was unable to announce its earnings at such a stage.

In giving a reason for the delay, Toshiba said that there had possibly been "inappropriate pressure" from the management of its U.S. nuclear unit Westinghouse Electric Co., which it bought in 2015, when evaluating the value of its assets.

On Jan. 8 and 19, a Westinghouse executive blew the whistle on the company in letters to the Westinghouse president, and an investigation by lawyers and an auditing company took time so the company was unable to settle its accounts. If the information from the whistleblower is accurate it could affect accounting details, so Toshiba decided that there was no option but to delay the announcement on its earnings.

Tsunakawa finally opened the news conference at about 6:30 p.m., but when it came to the details of the whistleblower's report, a Toshiba executive who was present repeatedly stated that the matter was under investigation and so the company would refrain from commenting.

At the same time, Toshiba stated that it took the unusual step of announcing its earnings in the form of an outlook including massive losses as the amount was unlikely to change significantly based on the results of an investigation into the whistleblower's report, according to a Toshiba official.

A major accounting scandal was uncovered at Toshiba in 2015. On that occasion, the company had not managed to announce its earnings on time, and there were two delays. Then president Hisao Tanaka resigned to take responsibility, and the company had been working on management reconstruction and restoring trust.

With the announcement of the massive losses on its U.S. nuclear business, however, Toshiba has once again waded into management woes and on Feb. 14, the company gave news that Chairman Shigenori Shiga, who was in charge of the nuclear unit would step down to take responsibility. Yet while Shiga bore a large responsibility he did not appear at the news conference by Tsunakawa.

It is extremely rare for a company listed on the first section of the Tokyo Stock Exchange to repeatedly suddenly delay announcements on its earnings, and it appears that for Toshiba, the path to restoring trust will be a long one.

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