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Western Digital
shares fell sharply on a report that talks about merging the company’s flash memory business with its joint-venture partner Kioxia have been terminated.
Western Digital (ticker: WDC) has two primary businesses: disk drives and flash memory products. The flash business, acquired via the $19 billion purchase of SanDisk in 2016, shares production facilities with Kioxia, a Japanese company that was once a division of
Toshiba.
While Toshiba continues to own a little over 40% of the business, most of the rest is held by a group of investors led by Bain Capital.
There have been reports for many months now that Western Digital and Kioxia were discussing a transaction in which Western would combine its flash business with Kioxia, separating it from the disk drive operations. The activist investment firm Elliott Management has been pressuring Western to spin off the flash business since May 2022, and the company has agreed to consider potential strategic transactions.
Nikkei Asia reported, without identifying the sources of the information, that negotiations between the two sides have come to a halt. According to the Nikkei story, Western told Kioxia that it was leaving the talks following a failure to win support from the Korean chip maker
SK Hynix,
which is part of the Bain Capital investment group that hold a majority stake in Kioxia.
Neither Kioxia nor Western Digital immediately responded to a request for comment.
On a conference call with investors on Wednesday, Hynix said that it was opposed to the combination that was being contemplated. “The company is not agreeing to the deal at this time in light of the overall impact on the value of the company’s investment in Kioxia,” a Hynix official said on the call, according to a transcript of the event. “Please understand that we cannot disclose the specific reasons or comment on the deal process due to the confidentiality agreement with Bain.”
Wall Street still thinks the structure of Western Digital will eventually change, whether or not the deal happens.
Wells Fargo analyst Aaron Rakers said in a research note that he isn’t sure whether the deal is really off the table, or has only been delayed. “We still believe that some structural move coming out of Western Digital’s strategic review process will ultimately come to fruition,” he wrote.
Wedbush analyst Matt Bryson has a similar view. “The primary immediate catalyst for value creation from a deal is tied to the split of WDC’s NAND and HDD businesses resulting from any agreement,” as opposed to the combination of Kioxia with WD’s flash business.
“With Elliott still invested in WDC (along with Apollo), we believe there is a meaningful probability that the conclusion of the strategic review will still end with a split of WDC’s businesses (with or without a Kioxia agreement), a result that we see as creating significant value for shareholders,” Bryson said.
Western Digital shares were down 11% to $37.69 in afternoon trading.
Write to Eric J. Savitz at [email protected]
Read the full article here
