Private Equity Firms Considering Toshiba Takeover Face Nuclear Dilemma

That’s the multi-billion dollar conundrum facing private equity firms trying to take over Toshiba Corp. : what to do with the sensitive nuclear activities of the troubled conglomerate?

Toshiba, which initially opposed a takeover, now plans to solicit proposals from potential investors in a dramatic shift in stance. Nuclear unity, seen as important to Japan’s national security, could be the biggest obstacle to any deal.

As private equity giants including Bain Capital, CVC Capital Partners and KKR & Co. consider bids for the company, one of their biggest challenges will be devising a plan that will gain government approval. According to experts, they have no easy choices.

“If a foreign fund were to buy Toshiba, it would be subject to government scrutiny under the Foreign Exchange and Foreign Trade Control Act,” said Mitsuhito Taki, corporate legal attorney at Yanagida & Partners in Tokyo. “It would be difficult to allow a foreign fund to acquire the company given Toshiba’s current business profile.”

Representatives for CVC and KKR declined to comment. Bain had no comment.

Toshiba’s nuclear business is involved in the dismantling of the destroyed Fukushima No. 1 nuclear power plant, which makes it difficult for the government to accept a transfer of ownership to a foreign company. The company is also upgrading existing nuclear power plants across the country to meet post-Fukushima safety standards and resume operations.

One solution for global private equity firms would be to allow a Japanese partner to take a majority stake in Toshiba, according to Taki. This would make it easier for the government to approve a deal and also reduce the potential liability of any foreign buyer.

But given that Toshiba has a market value of 2 trillion yen ($18 billion), that would also mean a Japanese buyer would have to put down at least 1 trillion yen, an amount that would be difficult for any fund or company. Japanese who might be interested, says Taki.

Another approach would be to keep the company and try to meet the demands of the Japanese government. According to Seki Obata, an associate professor at Keio Business School in Tokyo, that is unlikely to happen.

“I don’t think the funds want those kinds of problems,” he said. “Besides, running the business while negotiating the sensitive issue with the government would be too difficult for them.”

Another option would be to sell the nuclear unit, either before or shortly after a private equity deal. However, finding a buyer would not be easy, according to Ryuzo Yamamoto, professor emeritus specializing in energy policy at the University of Tokoha in Shizuoka prefecture.

Toshiba’s nuclear technology has lagged trends outside of Japan, Yamamoto said. The company lags behind its foreign rivals in the development of advanced small modular reactors. And Toshiba’s boiling water reactors are not being considered for use in future projects.

According to Obata, his compatriot Hitachi Ltd., which also has a nuclear activity, would be the only realistic buyer. Still, he argued that Hitachi was unlikely to raise its hand as it is also drastically reviewing its portfolio, including the sale of non-core businesses.

Buying Toshiba’s nuclear business “would slow the speed of its own reforms”, he said.

Keiji Kojima, chairman of Hitachi, was asked if he was interested in acquiring Toshiba’s nuclear business on Thursday at a press conference.

“I hardly have such thoughts about it,” he said.

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