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Western Digital warns Toshiba over breaching contract, wants exclusive chip talks

A Western Digital office building is shown in Irvine, California, U.S., January 24, 2017.
Mike Blake | Reuters

Western Digital has warned Toshiba that the Japanese firm is violating a joint venture contract in plans to sell to its chip unit and urged that it be given exclusive negotiating rights.

In a strongly worded letter dated April 9, Western Digital, which operates a semiconductor plant with Toshiba in Japan, said the transfer of the venture's rights to a new chip unit which was split off recently without the U.S. firm's consent was a "very serious breach".

The letter, seen by Reuters, also said the U.S. firm would not sit idly by while Toshiba "runs roughshod" over its rights, although it did not threaten legal action.

The move, seen as a play by the California-based company to strengthen its hand in talks, is set to complicate the auction of the prized unit - a sale essential to Toshiba's plans to cover writedowns at U.S. nuclear unit Westinghouse that have plunged it into crisis.

"The only thing holding Toshiba up at the moment is the sale of the memory chip business. This definitely increases the uncertainty around everything that is happening," said an executive at one of Toshiba's main banks.

Toshiba's memory business was stronger than expected: Analyst

Sources at Toshiba's banks said they had been told by the Japanese conglomerate that there were no legal problems with its decision to split off the chip business.

The auction has drawn strong interest, and Toshiba has narrowed down the field to just four suitors to move on to a second round of bidding, people briefed on matter said.

U.S. chipmaker Broadcom has put in the highest first-round offer of 2.5 trillion yen ($23 billion) while Taiwan's Foxconn, the world's largest electronics contract manufacturer, offered 2 trillion yen, one of the people said.

Western Digital' s bid was far below both those offers, the person added.

Broadcom has partnered with U.S. private equity firm Silver Lake Partners, the sources added.

The size of the offer made by South Korean chipmaker SK Hynix, the fourth suitor, was not immediately known.

The sources declined to be identified as they were not authorized to speak on the matter publicly.

Toshiba declined to comment on the content of the contract with Western Digital and the auction process. Representatives for Broadcom, Silver Lake, Western Digital, Foxconn could not be reached immediately for comment outside of regular business hours.

Attack on Broadcom

In the letter sent by CEO Stephen Milligan and addressed to Toshiba's board of directors, Western Digital said rumoured bids of between 2 trillion yen to 3 trillion yen were well above the fair value of the business and cited analysts' estimates of around 1.5 trillion yen.

It added that it had invested more than $13 billion in their joint venture over the last 17 years and had repeatedly tried address its concerns with Toshiba but had not received "constructive engagement."

It said it was urging Toshiba "to cease acting as if Western Digital were simply a disfavoured bidder in an open auction and instead enter into substantive, exclusive negotiations."

Toshiba woes: 'I think they will survive'

Western Digital also said that other rumored bidders are highly problematic for both Japan and the joint venture and specifically named Broadcom, saying that it had grave concerns based on recent commercial dealings with the firm.

The U.S. chipmakers are seen as more favored bidders as the Japanese government has vowed to vet bidders and block a sale to investors it deems a risk to national security.

In particular Foxconn, formally known as Hon Hai Precision Industry, is considered such a risk because of its deep ties with China, sources have previously said.

The news of the letter comes one day after Toshiba filed twice-delayed business results without an endorsement from its auditor and warned its very survival was in doubt.

Toshiba has said it expects to book an annual net loss of 1 trillion yen ($9 billion) for this business year on a writedowns at Westinghouse.