Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

HK Type 4 license through Ballingal Investment Advisors Ltd. ("BIA" or "BIAL")

BACKGROUND
I have 20+yrs experience in Asia doing alternative strategies (i.e. non-delta1 non long-only) in fixed income, equity derivatives, and activist/catalyst/event-driven and long-short equity strategies with most of that time spent managing money. 

4 years in fixed income macro, 8 years running internal hedge fund and 4yrs investment banking at Citi in Japan, 3 years running an Asia multi-strat portfolio at a hedge fund, 4+yrs as an independent special situations analyst.

Pan-Asia Catalysts/Events

Toshiba Memory Deal Changing Shape But Likely a Temporary Stalemate

Toshiba On the Horns of a Delisting Dilemma

Toshiba Memory - The INCJ Bid and Why Structure Matters

Quiddity Advisors

Event-Driven

There have been several pieces of news on <a href="https://www.smartkarma.com/entities/637" target="_blank" data-smartkarma-citation="entities:637:1">Toshiba Corp (6502 JP)</a> since late last week, and a fair bit of Japanese media coverage of the company.  <h2>The David Einhorn News</h2>The headline-grabbing "big news" since the last update is that according to a Bloomberg <a href="https://www.bloomberg.com/news/articles/2017-07-14/einhorn-s-greenlight-adds-toshiba-ends-mallinckrodt-short-wager" target="_blank">article</a> Friday, David Einhorn's Greenlight Capital purchased shares in Toshiba in Q2. For substantially more discussion on that, please see the accompanying insight <a href="https://www.smartkarma.com/insights/the-einhorn-bet-and-what-might-toshiba-be-worth" target="_blank" data-smartkarma-citation="insights:12121">The “Einhorn Bet” And What Might Toshiba Be Worth?</a><h2>Court News</h2>The more important news is that the California Superior Court decided that SanDisk's motion for preliminary injunction of the sale of TMC would be continued to July 28th (hearing scheduled 1:30pm to be heard with case number 559962 (a related petition for injunctive relief against Toshiba's retaliatory action; July 6 petition available <a href="https://imgquery.sftc.org/Sha1_newApp/ViewPDF.aspx?PDFName=05933697&amp;DocumentId=05933697&amp;MindsCat=C" target="_blank">here</a>)), with a stipulated order that there would be no sale of interest in the meantime. Judge Kahn also said that Toshiba should give WDC two weeks' notice if it thought that it would close the deal before arbitration had been completed. <ul><li>This is clearly a 'placeholder decision' giving the two parties time to perhaps change their minds, or to give the court time to prepare for the July 28 petition hearing. It is clear that both the injunction against the sale and the injunction against retaliatory action are questions where the California court has to decide whether it has jurisdiction or not. That has only partially been made clear with Friday's decision.</li><li>Toshiba <a href="http://www.toshiba.co.jp/about/press/2017_07/tp_j1501.htm?from=RSS_PRESS&amp;uid=20170715-5036#PRESS" target="_blank">said</a> it would not close the deal until July 28th. The likelihood of closing a deal, with payment, within two weeks, is nigh zero, for no other reason that they'd get slammed the same way the EU just slammed the Canon acquisition of Toshiba Medical. So this just delays ongoing negotiations on the US-ROK-Japan Consortium until the California court decides whether it will play hardball. </li><li>WDC <a href="http://files.shareholder.com/downloads/WDC/4703306554x0x949612/9F4405E6-04D4-4692-9106-96C0A02E6C91/WDC_News_2017_7_14_General_Releases.pdf" target="_blank">spun</a> it as a 'victory'.  This is not so much an out-and-out victory for WDC as evidence that it might have the ear of the Court to try to and injunct the closing of a contract when it came, even if months from now. That creates a precedent.</li><li>As Toshiba does not yet agree that the California court has jurisdiction, the judge proposed they come up with final language for his proposed order by July 28th when the separate hearing will take place. As this is a cross-border situation, this makes sense. The judge will have substantial extra work to deal with jurisidiction issues. It also suggests that because neither side will present their case - even if prepared - prior to the 28th, the likelihood of a ruling handed down on the 28th based on those preparations is low, unless the judge comes to his own conclusion prior to that. </li></ul>In the meantime, it would be meet that the US-ROK-Japan consortium - in particular the INCJ - discuss the issues with WDC, but until the judgment is handed down on the 28th or after, unless the judge denies California court jurisdiction, there is no reason for WDC to be accommodative. Given that the Request for Arbitration SanDisk and its subsidiaries filed with the ICC International Court of Arbitration on 14 May 2017 is not expected to see the case open until Q4, and from there it will take 1-2yrs, Toshiba still needs a clear judgment from either the US court or the Japanese court that the US court does not have jurisdiction AND that Toshiba has no requirement to seek WDC's consent. This is not over by any stretch, and ultimately, the risk here is on Toshiba. The buyers do not need to buy.<h2>INCJ/Bain/SK Hynix Preferred Bidder Group News</h2>The Asahi newspaper has carried two major articles of interest on Toshiba this week.Thursday saw an <a href="http://digital.asahi.com/articles/ASK7D4W9QK7DULFA012.html?_requesturl=articles%2FASK7D4W9QK7DULFA012.html&amp;rm=515" target="_blank">article</a> (J only) suggesting PwC Aarata had been open with the regulators and Toshiba about the likelihood of not signing the Toshiba results filing with an auditor opinion on Aug 10th. Toshiba responded with a pretty bland <a href="https://www.smartkarma.com/entities/toshiba-corp/news" target="_blank">denial</a> (see Exchange Announcement on the 13th) that PwC Aarata had informed them they would not sign off. Toshiba's response came in the form of a standard Japanese corporate denial which effectively says "anything which has not been made official is in fact, not official. It was a pro forma denial only. It is common for the Nikkei to leak news of a merger, the two companies to deny during trading hours that anything has been decided, then announce after the close a deal has been decided and has been in the works for many months. It was that kind of denial.That article contained several interesting points: <ul><li>The pressure on whether Westinghouse and Toshiba recognized the loss necessary on Westinghouse is both a Japan issue and an issue with PWC in the US auditing Westinghouse. IF the issue is deemed only to be a WH issue, it is possible that the Japanese execs at Toshiba HQ could be given a free pass on the accounting control because it could be tantamount to fraud conducted by the WH execs. It is to be noted that there were whistleblowers to the Japan HQ that WH was being aggressive in its accounting and therefore this may be a stretch.</li><li>The article notes the Annual Securities Report would be accepted by the Kanto Local Finance Bureau division of the FSA regardless of whether it contained an audit opinion.</li><li>The article notes that if the TSE regards the lack of opinion as making it "difficult to maintain the order of the market", Toshiba could be delisted. But we knew this already.</li><li>The writer suggests that even if the report is submitted with No Opinion, the TSE would not decide to delist the company immediately. By the syntax used, this was clearly the writer's opinion and not researched 'fact'; I agree it might not be immediate because the TSE would have to 'consider the information', but it might not take too long. </li></ul>Note: The article generally tilted to an opinion that I thought gave Toshiba management a pass.The Asahi then had an <a href="http://www.asahi.com/articles/DA3S13037546.html" target="_blank">article</a> (paywall) saying SK Hynix would contribute 520bn yen of funding, Japan Post Bank was expected to pony up 30bn yen, and Toshiba itself would participate for 200bn yen. That article suggested Toshiba was still not keen on SK Hynix participating and the implication was that this was a possible contributor to the delay. This goes back to the point made in <a href="https://www.smartkarma.com/insights/toshiba-memory-the-incj-bid-and-why-structure-matters" target="_blank" data-smartkarma-citation="insights:11678">Toshiba Memory - The INCJ Bid and Why Structure Matters</a> - the deal structure as proposed quite clearly was set up to allow parties to be mixed and matched, and leave room for Toshiba's participation. A bit more below the fold.

There have been several pieces of news on Toshiba Corp (6502 JP) since late last week, and a fair bit of Japanese media coverage of the company.  The David Einhorn NewsThe headline-grabbing "big news" since the last update is that according to a Bloomberg article Friday, David Einhorn's Greenlight Capital purchased shares in Toshiba in Q2. For substantially more discussion on that, please see the accompanying insight The “Einhorn Bet” And What Might Toshiba Be Worth?Court NewsThe more important news is that the California Superior Court decided that SanDisk's motion for preliminary injunction of the sale of TMC would be continued to July 28th (hearing scheduled 1:30pm to be heard with case number 559962 (a related petition for injunctive relief against Toshiba's retaliatory action; July 6 petition available here)), with a stipulated order that there would be no sale of interest in the meantime. Judge Kahn also said that Toshiba should give WDC two weeks' notice if it thought that it would close the deal before arbitration had been completed. This is clearly a 'placeholder decision' giving the two parties time to perhaps change their minds, or to give the court time to prepare for the July 28 petition hearing. It is clear that both the injunction against the sale and the injunction against retaliatory action are questions where the California court has to decide whether it has jurisdiction or not. That has only partially been made clear with Friday's decision.Toshiba said it would not close the deal until July 28th. The likelihood of closing a deal, with payment, within two weeks, is nigh zero, for no other reason that they'd get slammed the same way the EU just slammed the Canon acquisition of Toshiba Medical. So this just delays ongoing negotiations on the US-ROK-Japan Consortium until the California court decides whether it will play hardball. WDC spun it as a 'victory'.  This is not so much an out-and-out victory for WDC as evidence that it might have the ear of the Court to try to and injunct the closing of a contract when it came, even if months from now. That creates a precedent.As Toshiba does not yet agree that the California court has jurisdiction, the judge proposed they come up with final language for his proposed order by July 28th when the separate hearing will take place. As this is a cross-border situation, this makes sense. The judge will have substantial extra work to deal with jurisidiction issues. It also suggests that because neither side will present their case - even if prepared - prior to the 28th, the likelihood of a ruling handed down on the 28th based on those preparations is low, unless the judge comes to his own conclusion prior to that. In the meantime, it would be meet that the US-ROK-Japan consortium - in particular the INCJ - discuss the issues with WDC, but until the judgment is handed down on the 28th or after, unless the judge denies California court jurisdiction, there is no reason for WDC to be accommodative. Given that the Request for Arbitration SanDisk and its subsidiaries filed with the ICC International Court of Arbitration on 14 May 2017 is not expected to see the case open until Q4, and from there it will take 1-2yrs, Toshiba still needs a clear judgment from either the US court or the Japanese court that the US court does not have jurisdiction AND that Toshiba has no requirement to seek WDC's consent. This is not over by any stretch, and ultimately, the risk here is on Toshiba. The buyers do not need to buy.INCJ/Bain/SK Hynix Preferred Bidder Group NewsThe Asahi newspaper has carried two major articles of interest on Toshiba this week.Thursday saw an article (J only) suggesting PwC Aarata had been open with the regulators and Toshiba about the likelihood of not signing the Toshiba results filing with an auditor opinion on Aug 10th. Toshiba responded with a pretty bland denial (see Exchange Announcement on the 13th) that PwC Aarata had informed them they would not sign off. Toshiba's response came in the form of a standard Japanese corporate denial which effectively says "anything which has not been made official is in fact, not official. It was a pro forma denial only. It is common for the Nikkei to leak news of a merger, the two companies to deny during trading hours that anything has been decided, then announce after the close a deal has been decided and has been in the works for many months. It was that kind of denial.That article contained several interesting points: The pressure on whether Westinghouse and Toshiba recognized the loss necessary on Westinghouse is both a Japan issue and an issue with PWC in the US auditing Westinghouse. IF the issue is deemed only to be a WH issue, it is possible that the Japanese execs at Toshiba HQ could be given a free pass on the accounting control because it could be tantamount to fraud conducted by the WH execs. It is to be noted that there were whistleblowers to the Japan HQ that WH was being aggressive in its accounting and therefore this may be a stretch.The article notes the Annual Securities Report would be accepted by the Kanto Local Finance Bureau division of the FSA regardless of whether it contained an audit opinion.The article notes that if the TSE regards the lack of opinion as making it "difficult to maintain the order of the market", Toshiba could be delisted. But we knew this already.The writer suggests that even if the report is submitted with No Opinion, the TSE would not decide to delist the company immediately. By the syntax used, this was clearly the writer's opinion and not researched 'fact'; I agree it might not be immediate because the TSE would have to 'consider the information', but it might not take too long. Note: The article generally tilted to an opinion that I thought gave Toshiba management a pass.The Asahi then had an article (paywall) saying SK Hynix would contribute 520bn yen of funding, Japan Post Bank was expected to pony up 30bn yen, and Toshiba itself would participate for 200bn yen. That article suggested Toshiba was still not keen on SK Hynix participating and the implication was that this was a possible contributor to the delay. This goes back to the point made in Toshiba Memory - The INCJ Bid and Why Structure Matters - the deal structure as proposed quite clearly was set up to allow parties to be mixed and matched, and leave room for Toshiba's participation. A bit more below the fold.

Mitsubishi UFJ Financial (MUFG) (8306 JP)

Toshiba Plant Systems & Services (1983 JP)

Toshiba Update - Court Cases, SK Hynix, and Auditor Risk