Monday, February 27, 2017

How Toshiba Lost $6 Billion

Since its founding in 1873 as Japan’s first maker of telegraph equipment, Toshiba has survived a litany of challenges, from the Great Kanto earthquake of 1923, to having its factories bombed into rubble during World War II, to the drubbing of the Zune music player it co-developed with Microsoft. Now the conglomerate may be undone by four nuclear power plants under construction in the American South. Blown deadlines and budgets at the reactors in Georgia and South Carolina overseen by Toshiba’s Westinghouse Electric subsidiary resulted in the resignation of Toshiba Chairman Shigenori Shiga on Feb. 14 and a 712.5 billion yen ($6.3 billion) writedown on its nuclear reactor business.

That charge to cover cost overruns at Westinghouse eclipses the $5.4 billion that Toshiba paid for the company in 2006. The financial fallout of the nuclear business’s collapse is far greater. To stay afloat, Toshiba says it may have to sell a majority stake in its last remaining crown jewel: its flash-memory business, which makes chips used in smartphones and solid-state disk drives. The company already sold off its consumer electronics and medical equipment businesses following an accounting scandal in 2015.

“Toshiba is being torn apart,” says Amir Anvarzadeh, head of Japanese equity sales at BGC Partners in Singapore. “It’s going to survive, it’s not going to go bankrupt. But it’s the end of Toshiba as a company with any hopes to grow.”

Many investors apparently agree. The company, which had already lost $7 billion in market value over the past six weeks, saw its shares fall an additional 10 percent after the announcement of the writedown and Shiga’s departure. Another worry for the markets is that the huge Westinghouse charge will cause the company’s shareholder equity to drop to negative 150 billion yen for the current year ending in March, according to Toshiba forecasts.

Besides Toshiba investors, there’s another group of big losers: advocates of nuclear power, who had high hopes for Westinghouse, which in 2008 became the first U.S. company to win nuclear power plant construction permits since the 1979 Three Mile Island accident. But the nuclear renaissance Toshiba bet on never materialized, in part because the company couldn’t build reactors along the timelines and within the budgets it had promised. It had anticipated that Westinghouse’s next-generation AP1000 modular reactor design would be easier and faster to execute—just the opposite of what happened. In a briefing after the writedown announcement, Toshiba President Satoshi Tsunakawa said the company may now pull out of nuclear plant construction altogether and only provide equipment and engineering services, which would make it extremely difficult for it to sell nuclear projects to customers. All options are on the table for the nuclear business, including a possible sale of Westinghouse, he said.

“There’s billions and billions of dollars at stake here,” says Gregory Jaczko, former head of the U.S. Nuclear Regulatory Commission (NRC). “This could take down Toshiba, and it certainly means the end of new nuclear construction in the U.S.”

by Jason Clenfield,Yuji Nakamura, Takashi Amano,
Pavel Alpeyev, and Stephen Stapczynski, Bloomberg |  Read more:
Image: 731; Photos: AP Images (1); Getty images (1)