Shares of Western Digital (WDC) are down $4.33, or almost 5%, at $85.59, following a report this morning by The Journal stating that its NAND flash memory-chip partner, Toshiba (6502JP), has chosen a consortium including private-equity firm Bain Capital, and Apple (AAPL) and Dell Technologies, to buy the chip units underlying their joint venture, as related by my colleagueAdam Routh on Asia Stocks to Watch.
This report follows the report a week ago that Toshiba had signed a “letter of intent” with the Bain group.
Toshiba issued a statement following the Journal report, saying that it has “decided on the sale of all shares of Toshiba Memory Corporation to KK Pangea, a special purpose acquisition company formed by Bain Capital…” for “approximately 2 trillion yen.”
Toshiba said it aims to close the deal by March, 2018.
Regarding its partnership with Western, which last year bought Toshiba partner SanDisk, Toshiba said “any future collaboration between SanDisk and TMC will be discussed by the two parties.”
Reuters‘s Makiko Yamazaki has further reporting on the matter.
Despite this adverse development for Western, Cowen & Co.’s Karl Ackerman today reiterates an Outperform rating, and a $117 price target, writing that the “risk-reward” is still favorable for Western shares, after assessing a variety of scenarios.
Western is in back and forth litigation with Toshiba, and so until the deal closes with Bain, it would appear any number of things are possible, according to Ackerman.
The big question Western shareholders need to ask is ” What is the downside risk if Toshiba sells its memory business to a third party and WDC does not have access to Fab 6?” according to Ackerman.
Ackerman has four scenarios, with the “base case” being that things end up being “status quo” for Western and Toshiba. He thinks that scenario has a 40% probability, higher than the other three scenarios.
After valuing the hard disk drive business at $40 per Western share, Ackerman thinks the current share price leaves a lot of upside if the worst-case scenario doesn’t play out:
Our base case assumes “status quo” of WDC’s ownership in Flash Ventures and its access to NAND IP and manufacturing that will help drive 75% of its NAND bits to 64L by the end of CY2017. In this context, our analysis suggests CY2018 EPS of $12.45 (Street $11.97) and valuation of $117/share (based on ~9x CY18E EV/FCF and 10x CY18E EPS (excluding SBC)). In a more optimistic case where WDC acquires a less than 20% minority stake of Toshiba’s memory biz that could add $1-$1.50 EPS/yr (see Could The Toshiba Saga End? Our Updated Thoughts on Pro Forma Model), WDC could approach ~$135/share. Conversely, in an uber-bear case where NAND ASPs crash (-35% Y/Y), cost/GB is no better than low-to-mid teens, Toshiba sells its memory assets to a third party and WDC is not able to block the sale through the arbitration process, WDC could be worth $60 (HDD biz ~$40 and NAND biz approaches TBV of ~$20. From here, at ~$90/share, the stock is discounting the NAND business at $45/sh, or nearly HALF the value WDC paid for it just ~16 months ago (see WDC For SNDK; Good Time To Sell). Thus, we think the risk/reward is still attractive at current levels despite uncertainty, and this work supports our contention.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.