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Risk of breaking up hangs over Toshiba after 712 billion yen nuclear loss in U.S.

Toshiba Corp. has effectively fallen into a capital deficit as the result of a 712.5 billion yen ($6.3 billion) write-down for its U.S. nuclear business in its Feb. 14 outlook for the April-December 2016 period.

Suspicions of inappropriate accounting in connection with its U.S. nuclear business have arisen and its woes have increased, with the company being forced to delay its formal earnings report that it was supposed to release on Feb. 14.

The company is considering spinning off its semiconductor business and selling the majority of shares to cut debt, but by shedding its well-performing businesses, Toshiba faces the risk of breaking up.

When prodded in a news conference on Feb. 14 over the decision to invest 5.4 billion dollars (roughly 610 billion yen) in U.S. nuclear power plant manufacturer Westinghouse Electric Co. in 2006, Toshiba Corp. President Satoshi Tsunakawa evasively responded, "It is difficult to say that it was correct."

At the time of the purchase, Toshiba had expected an increase in nuclear exports to emerging countries due to increased demand for nuclear power. However, the market environment changed completely as a result of the meltdowns at Tokyo Electric Power Co.'s Fukushima No. 1 Nuclear Power Plant in March 2011. Westinghouse took orders for four nuclear reactors in 2008, but costs surged when authorities tightened regulations, and Toshiba was left having to book a 712.5 billion yen write-down in its latest forecast.

As of the end of December 2016, Toshiba's liabilities exceeded its assets by 191.2 billion yen. The biggest concern with regard to the company's survival is whether it will be able to secure capital through the sale of businesses by the end of March to recover.

At first, Toshiba had painted a scenario of spinning off its flash memory business for smartphones and other devices and unloading 19.9 percent of shares in the new company to acquire at least 200 billion yen. But under its Feb. 14 outlook, the electronics giant indicated it was now considering selling a majority stake.

"Selling all (of the shares) is a possibility," Tsunakawa said. "We're thinking flexibly."

Flash memory is the core of Toshiba's semiconductor business, accounting for about 30 percent of its sales. The reason Toshiba had sought to sell under 20 percent of shares in the business was to maintain the initiative and preserve what has been a valuable source of earnings.

However, bidding companies and investment funds had remarked that there was little appeal in a capital investment of under 20 percent. It is therefore possible that bids could remain low, leaving the company in a "crunch," according to one Toshiba source.

If Toshiba sells a bigger stake, then it will find some temporary relief through the shoring up of its capital base, but such a move would diminish its earning capacity over the long run.

Since Toshiba became embroiled in an accounting scandal in 2015, its management woes have deepened, and the company booked a consolidated net loss of 460 billion yen for the business year ending in March 2016. Toshiba sold its medical equipment unit, which had high potential, for 665.5 billion yen and also sold its white goods business in a bid to get back on its feet. But in spite of this, the company expects to see red ink for the latest business period. If it releases its semiconductor business, a jewel of the company, there will be practically nothing left to serve as Toshiba's main pillar.

In the meantime, Toshiba plans to scale back its overseas nuclear business, which was the cause of its massive losses for the latest business period. Hosokawa has suggested that the company is considering selling its shares in Westinghouse. However the global environment in which nuclear operations stand is tough, and finding a buyer remains a difficult task.

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