Toshiba: earnings shock increases the chances of a buyout deal

Three is a lucky number in Japan. Not for Toshiba it seems. In the past week, the electronics conglomerate has received a buyout offer at a discount to its market value, suffered the resignation of its chief operating officer over the inappropriate use of entertainment expenses, and reported worse than expected third-quarter results after the market close. Toshiba increasingly faces a buyer’s market from acquirers.

It will get worse. Toshiba slashed this year’s operating earnings estimate for the second time in a row on Tuesday. This comes after its operating profit fell 88 per cent to ¥5.3bn ($40.4mn) in the December end period. Hard disc drive sales fell. Also it booked an impairments for its power and printer businesses. COO Goro Yanase’s resignation adds corporate governance concerns to an already tainted image.

But the timing is opportune for buyers. Toshiba received a $15bn buyout proposal from a consortium led by Japan Industrial Partners last week. That price was then at a discount to Toshiba’s market value. That has become a premium.

Shares are down a quarter from a June high. Of its six main businesses, its infrastructure systems unit and its energy systems business, along with its 40 per cent stake in chipmaker Kioxia, are already worth more than its group market value. Infrastructure and energy systems together account for just a third of group net sales.

Toshiba needs the restructuring its buyers would help it achieve. A persistent conglomerate discount will only worsen. The group has lost more than $2bn since Bain’s buyout plan first surfaced last year.

The struggling conglomerate has received eight buyout offers in recent years. But its eroding earnings, and lossmaking units, will eventually deter all buying interest. Toshiba will have to settle for a much lower price if this does occur. Missing the market’s earning expectations in such a dramatic fashion should increase the chances of a deal.