SanDisk China to Sell to JCET Majotity of Equity Interest in SanDisk Semiconductor (Shanghai) Indirect Subsidiary of Western Digital

On March 3, 2024, SanDisk China Limited, an indirect wholly-owned subsidiary of Western Digital Corporation entered into an Equity Purchase Agreement with JCET Management Co., Ltd., a wholly-owned subsidiary of JCET Group Co., Ltd., a Chinese publicly listed company, under which SanDisk China will sell to JCET a majority of the equity interest in SanDisk Semiconductor (Shanghai) Co. Ltd. (SDSS), an indirect wholly-owned subsidiary of Western Digital and a wholly-foreign owned enterprise incorporated as a limited liability company in the People’s Republic of China, thereby forming a joint venture between SanDisk China and JCET.

Consummation of the transaction is expected to occur in 3Q24.

JCET will acquire 80% of the equity interest of SDSS for approximately $624 million based on a valuation of SDSS of $780 million.

Payment will be made over five years as follows: (i) $218.4 million will be paid shortly after the closing, subject to certain customary closing adjustments for cash, indebtedness and net working capital, (ii) $218.4 million will be paid in a second tranche closing at the later of January 1, 2025 and the date 6 months following the closing, and (iii) the remaining $187.2 million will be paid in 5 equal installments of $37.44 million over the next 5 years following the closing.

The company expects to use the proceeds to strengthen its financial position and flexibility as it moves toward completion of its previously announced separation of its HDD and flash businesses.

After the closing, JCET will own 80% of the equity interest in SDSS while SanDisk China will own the remaining 20%.

Subject to completion of the ancillary agreements described below, the company expects that the transaction will result in deconsolidation of SDSS and plans to account for its remaining indirect investment in the joint venture under the equity method of accounting.

The Equity Purchase Agreement includes customary representations, warranties and covenants, as well as customary interim covenants restricting SanDisk China from permitting SDSS to take certain corporate actions in between signing of the Equity Purchase Agreement and the Closing. It also contains customary post-closing indemnification obligations of each party with respect to breaches of their respective representations, warranties, covenants and agreements and certain non-compete and non-solicitation restrictions on the part of SanDisk China, subject to customary carve-outs.

The closing is subject to the satisfaction or waiver of certain closing conditions, including, among other matters: (i) execution and delivery of certain ancillary agreements (as described below); (ii) receipt and completion of certain government approvals and registrations (including completing PRC anti-trust filings); (iii) the absence of law or order that would prohibit or prevent the consummation of the transaction; (iv) receipt of certain 3rd party consents and other closing deliverables; (v) no material adverse effect having occurred and be continuing with respect to SDSS; and (vi) such other customary conditions set forth in the Equity Purchase Agreement.

The Equity Purchase Agreement may be terminated prior to closing: (i) by either the company or JCET in the event that (A) any restraint becomes effective, final and non-appealable, (B) there is an uncured breach of a representation, warranty or covenant such that the conditions to closing would not be satisfied, (C) either SanDisk China or JCET fails to consummate the closing within 5 business days after the satisfaction or waiver of the conditions or such other date agreed by both parties, or (D) certain conditions have not been satisfied or waived by December 31, 2024; or (ii) by the mutual consent of the parties.

SanDisk China may terminate the Equity Purchase Agreement after the closing in the event it has not received the 1st installment of payment of purchase price within 20 business days following the closing.

In the event the Equity Purchase Agreement is terminated due to either party’s breach or failure to close after the satisfaction or waiver of the conditions, the breaching party shall pay to the other a termination fee in the amount of $10 million. In the event the Equity Purchase Agreement is terminated due to the failure to obtain the PRC anti-trust approval, JCET shall pay to SanDisk China a termination fee in the amount of $10 million.

The Equity Purchase Agreement contemplates various ancillary agreements to be delivered as of the closing including: (i) a shareholders agreement governing the joint venture relationships from and after the closing; (ii) an IP license agreement; (iii) a manufacturing and supply agreement; and (iv) a transition services agreement.

Other Events
As a result of this transaction, the company expects to incur a modest reduction in annual operating expenses and a reduction in annual capital expenditures related to assembly and testing of flash-based products. It also anticipates that the transition to a contract manufacturing model through SDSS will result in a small increase in the company’s annual cost of revenue for flash-based products.

In connection with the transactions contemplated by the Equity Purchase Agreement, the following ancillary agreements are expected to be entered into at the closing:

Shareholders Agreement
At the closing, SanDisk China, JCET and SDSS will enter into the shareholders agreement that will set forth the rights and obligations of the parties in the joint venture, including designation of board members (of which JCET will appoint 3 members and SanDisk China will appoint 2 members) and officers. Under the shareholders agreement, SDSS will not be allowed to take certain corporate actions without requisite board or shareholder approvals. The shareholders agreement will also contain customary transfer restrictions (including a lock-up period), right of first refusal and co-sale rights, as well as certain call and put options with respect to the respective equity interest held by SanDisk China in SDSS.

IP License Agreement
At the closing, SDSS will enter into the IP license agreement with a subsidiary of Western Digital. Under this agreement, SDSS will be granted limited licenses to certain IP rights owned and used by Western Digital on a royalty-free basis for use in manufacturing products on behalf of one or more subsidiaries or affiliates of Western Digital for the term of and pursuant to the supply agreement. Products manufactured by SDSS for or on behalf of any 3rd-party customers utilizing or infringing any such Western Digital intellectual property rights will be subject to a royalty payment obligation to be mutually agreed upon by the parties.

Supply Agreement
At the closing, SDSS will enter into the supply agreement with WD buyer pursuant to which SDSS will agree to supply to WD buyer certain flash-based products manufactured by SDSS for a specified period of time following the Closing. These products may include flash memory cards, embedded flash products, and flash components.

The initial term of the supply agreement will be 5 years and will automatically renew for additional 12-month periods unless either party notifies the other party of its intent to terminate.

WD Buyer is expected to be the primary customer of SDSS for at least the initial term of the supply agreement, and has agreed to minimum purchases to meet specified revenue targets for the initial term. If WD buyer does not meet the minimum revenue targets, Western Digital will be required to compensate SDSS for a predetermined gross profit corresponding to the portion of the unmet revenue targets. During the initial term, SDSS will not provide products or services to Western Digital’s competitors without Western Digital’s consent.

Transition Services Agreement
At the closing, SDSS will enter into the transition services agreement with SanDisk China, under which SanDisk China and/or its permitted subcontractors will provide certain transitional information technology, financial, general managerial and other services for a limited duration in order to assist SDSS to manage its business in such manner as substantially conducted as of immediately prior to the closing. SDSS will pay SanDisk China specified fees for the services provided and reimburse SanDisk China and its permitted subcontractors out-of-pocket expenses in providing such services.