Toshiba and SanDisk to Reallocate NAND Flash Memory JV Production Capacity

Toshiba Corporation announced that Toshiba and SanDisk have signed a non-binding memorandum of understanding on the reallocation of wafer output and equipment ownership and funding at their two joint ventures producing NAND flash memory on 300 millimeter (mm) wafers at Toshiba’s Yokkaichi Operations in Japan, in response to a proposal from SanDisk. The move is designed to enhance the production flexibility of NAND flash memory in line with the rapidly changing marketplace and to optimize each company’s business strategies. The details will be set forth in definitive agreements.

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Fab 3 Flash Memory Facility in Yokkaichi, Japan

Fab 3 and Fab 4 at Toshiba’s Yokkaichi Operations are currently operated by Flash Partners, Ltd. and Flash Alliance, Ltd., the production joint ventures between Toshiba and SanDisk. Investment in the manufacturing equipment installed at the two fabs is equally shared by Toshiba and SanDisk through the JVs, with the same capacity allocated to each company. The revised allocation will make Toshiba the sole owner of some 30% of the total capacity. The remaining about 70% will still be owned by the JVs, and the production capacity allocated to the JVs will be divided equally between Toshiba and SanDisk. As a result, Toshiba’s overall allocation of capacity in the two fabs will increase by about 30%. By expanding its production capacity efficiently, Toshiba aims to increase sales of NAND flash memories.

Toshiba believes that the NAND flash memory market will continue to grow in the medium to long term with average annual bit growth rate of more than 200%, supported by such established applications as cellular phones and digital camcorders, and by emerging applications such as solid state drives (SSDs) for notebook computers and servers. Sole ownership of some 30% of the total capacity of the two fabs will allow Toshiba to be even more flexible in making decisions on production volumes in line with changes in market demand. Acquisition of part of the existing production equipment in use will also allow Toshiba to quickly expand its manufacturing capabilities at a lower cost and with a shorter ramp-up time than by procuring new equipment.

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THE COMMENTS OF OBJECTIVE ANALYSIS

TOSHIBA TO ACQUIRE 30% OF SANDISK’S SHARE OF JV PRODUCTION

On Monday, October 20, SanDisk and Toshiba announced a memorandum of understanding outlining the sale of 30% of SanDisk’s share of current manufacturing capacity of the companies’ joint ventures to Toshiba. SanDisk expects to receive cash and reduce equipment lease obligations by approximately $1 billion through this transaction. Few other details were given.

What this Means to SanDisk
This assets-for-cash swap will bolster SanDisk’s coffers during a time when the company’s stock price is depressed, but their cash position was not desperate during their last earnings announcement. Why would SanDisk be interested in an infusion of cash at this moment?
We can only guess that this cash might be used to repurchase depressed SanDisk shares whose price dropped on this news from around $16.50 last week to just under $14 at the writing of this Alert. SanDisk could use this measure to help thwart Samsung’s takeover bid, remaining independent until 2009’s NAND recovery drives its stock back to record levels.
Wall Street’s response to this situation has been negative. On September 16, when Samsung offered to purchase SanDisk shares at $26, the price of SanDisk stock rose to $21 before settling to around $16.50. It appears that traders believe that the Toshiba deal will cause Samsung to lose interest, so they are driving the stock back to prices that were in place before Samsung went public with the matter. This would certainly help SanDisk execute any repurchase they may choose to make.
One investment analyst postulated that the companies may also be re-working their JV agreements to include some sort of “Poison Pill” that would make SanDisk less appealing as a takeover target. We see no reason to accept this as anything more than speculation.

A Good Move for Toshiba?
Our first instinct was to compare Toshiba’s payment to Micron’s October 13 offer to purchase Qimonda's share of their Inotera JV. The Micron deal clearly got Micron a share of state-of-the-art facility at a bargain price. In the case of the Toshiba SanDisk deal this is not at all clear.
SanDisk’s June 28 SEC Form 10-Q spells out the company’s $1.3 billion investments in their JVs with Toshiba. If we take 30% of this figure we end up with only $390 million, roughly 1/3rd of the $1 billion in cash and reduced equipment lease costs that SanDisk expects to receive from the deal.
It appears that Toshiba is valuing this deal with a consideration to the future of the joint venture.
Ever since Samsung made public its desire to acquire SanDisk the industry has been abuzz with rumors of a Toshiba takeover. Although the SanDisk/Toshiba partnership would do better without a Samsung acquisition, Toshiba made it clear that a takeover was not in the cards. This move appears to be the company’s alternative.
Toshiba is a conglomerate with less than 9% of the company’s FY 2008 revenues coming from memory revenues. The company is not as troubled by today’s depressed NAND market than a less diverse firm might be. This should make it easier for Toshiba to find funds internally to help sustain a valued relationship.

What This Might Mean for Samsung
With the paucity of information contained in the releases it is not yet clear how Samsung will be impacted. Investors appear to believe that the Samsung takeover bid is threatened by this move, although lately there have been arguments that the deal was doomed from the start. These arguments center around recently disclosed court documents that indicate that SanDisk’s msystems patent acquisitions carry a considerably higher value than was previously thought. Some thought that this new disclosure proved that Samsung’s bid was well below SanDisk’s value. Nonetheless, SanDisk's stock did not rise on this finding.
It is only natural for us to suspect that the deal is aimed somehow at defending SanDisk from Samsung’s takeover attempt, but until the companies choose to reveal details of the agreement we w