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Short of the Week: Toshiba


Japanese-listed electronics giant Toshiba looks like it is in severe trouble: it may not be about to go out of business, but that does not mean its share price will not get hammered over the next few weeks. The company struggled to get its numbers together – it delayed getting its latest results out, and when they did arrive, its auditor refused to sign off on them. Toshiba has also warned that it could be facing net losses of over a trillion yen, making this one of the worst corporate losses in Japanese business history, no small achievement!

On top of this are record losses, the bankruptcy of Westinghouse Electric, its nuclear energy unit, and $2.1 billion in negative shareholder equity. This hammered Toshiba’s share price back in December, after which it has been seeing a gradual decline from around JPY 300/share to under 200.

Negative shareholder equity means that Toshiba could be about to get another downgrade, out of the prestigious Topix index and into the less liquid section of the Tokyo Stock Exchange. This will be bad, bad news for the company, as it will no longer be bought by major institutional fund managers or passive funds. There could be a lot of forced selling. It has been estimated that between 12% and 15% of Toshiba’s free float investor base is composed of passive (or at least not very active) investors who will dump the stock if it ends up in Tokyo’s second section of the exchange.

The downgrade will happen if it turns out Toshiba had negative shareholder equity for four consecutive quarters, ending 31 March of this year. Negative shareholder equity is very bad news: it means the company’s liabilities are outstripping its assets, and even with creative internal accounting, Toshiba has not been able to make the picture look any better for some time.

Toshiba has been around for a long time, indeed it is part of Japanese modern history, having been set up in 1875 to manufacture telegraph equipment in a rapidly industrialising Japan. It is a household name, which may tempt the Japanese government to bail it out, so short sellers will need to be aware of sudden political intervention.

There are plenty of companies with an eye to buying the struggling Japanese electronics whale, including in China, but here political considerations and the less than harmonious relations between China and Japan weigh in.

In addition to this, some buyers are looking to carve off the profitable pieces of Toshiba: at the time of writing Broadcom said it had lined up financing from three Japanese banks and a private equity firm to bid for Toshiba’s semiconductor business. Broadcom is thought to be offering $18 billion for the chip business. Other possible buyers include Hon Hai Precision Industry Co in Taiwan, and SK Hynix in South Korea.

Meantime Western Digital, which is Toshiba’s joint venture partner in the semiconductor business, said Toshiba could be in breach of contract by trying to sell the business to a third party, and that the valuations being attached to it by some suitors were unrealistic.

Over the last month, Toshiba’s share price has been trading in the JPY 240-180 range while the market tries to figure out what will happen. Three months ago it was close to JPY 300. Even if Toshiba manages to sell off its share of the semi-conductor business JV, and that is not a foregone conclusion, what value can the market possibly attach to what is left? A downgrade out of the Topix will mean sudden forced selling of Toshiba stock and much more volatility for this share price. The big question will be whether the Japanese government decides to take a role in this drama, and underwrite Toshiba, at least for the short term?

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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