Toshiba Approves Sale of Chip Unit – Trendfocus

This is a Trendfocus, Inc.‘s Executive Brief published on September 5, 2017.

Toshiba Approves Sale of Chip Unit, But When Will This Soap Opera End?

Last week, Toshiba’s board voted to sell its memory chip business to a consortium led by private-equity firm Bain Capital and joined by SK Hynix, Apple Inc., Dell Technologies Inc., Kingston Technology Corp. and Seagate Technology PLC.

The deal was reported as worth 2 trillion yen, or about $18 billion.

No details were disclosed by Toshiba
but we offer some thoughts and observations:
• Toshiba hopes to conclude the deal soon, with a new target of September 30.
• Western Digital will likely act to stop the transaction: Some of the company’s SanDisk subsidiaries started new arbitration proceedings against Toshiba on the day the deal was announced, although these appear to be related to the Aug 3, 2017 Toshiba announcement that it would unilaterally invest in manufacturing equipment for the Fab 6 clean room at the JV operations in Yokkaichi, Japan. The arbitration demand seeks to permanently prevent Toshiba from “making unilateral investments in manufacturing equipment for Fab 6 without first giving SanDisk the opportunity to make a comparable investment in expansions and conversions of JV capacity for BiCS 3D NAND flash memory.” 
• In addition to the initiation of new arbitration proceedings, Western Digital issued a press release commenting that Toshiba was pursuing the sale without the consent of SanDisk despite court rulings validating SanDisk’s contractual joint venture rights over changes in ownership. 
• Antitrust reviews around the world will commence as a final deal is struck, but this poses a significant timing challenge. Historically, these review processes are slow and arduous, and concluding them before the end of Toshiba’s fiscal year on March 31, 2018 will be challenging.

Client HDD demand for the busier second half of the year appears steady, with an accelerating shift to SMR-based, 1TB/disk mobile HDD designs for two suppliers. Overall build plans for HDDs of around 105 million in 3CQ17 include a 3% sequential increase in 3.5″ and a 10% rise in 2.5″ client HDDs from the prior quarter. While build plans do not necessarily track final shipment numbers, the directionality of the build plans late in 3CQ bode well for slightly improved HDD demand to service seasonal PC increases. The 2.5″ build jump also supports the expected final push for game console builds for 4CQ sales.

Hyperscale demand for 10TB also appears healthy and should closely match Trendfocus’ 3CQ17 forecast of nearly 3 million units for the quarter, or a 50% quarter-to-quarter jump. 10TB will continue as the mainstream hyperscale capacity over the next few quarters, before 12TB and 14TB SMR commence the next capacity transition in 2018. Some vendors are also projecting strong data center server demand in the second half of 2018, implying that any pause in hyperscale storage demand early next year may be short lived. Some flash suppliers believe that strong enterprise SSD demand in the back half of 2018 will absorb a large portion of the bit output growth, keeping supply tight to demand – or at least that is the hope for NAND companies.