Wednesday, October 04, 2017
Shares of Western Digital (WDC) continued to feel the pain from Toshiba’s (6502.JP/TOSYY) $17.8 billion deal to sell its flash memory chip business to a consortium led by Bain Capital that includes rival Seagate Technology (STX).
The shares are down 3.8% today to $83.13 a share after Baird analyst Tristan Gerra downgraded the stock to a Neutral from an Outperform and slashed its target price from $120 a share to $93 a share, describing what he called the “nuclear fallout potential” on Western Digital, which relies on joint ventures with Toshiba for its NAND memory for its NAND chip supply.
From here, potential outcomes for WD range from neutral to significantly negative. Ultimately, Toshiba owns its NAND flash manufacturing operations.
It is critical for WD that Flash Ventures extend to Fab 6; WD's 10K filing clearly states such partnership expansion is not guaranteed (please refer to the Details section).
Toshiba's Fab 6 JV proposal has expired; the company believes it is under no legal obligation to renew it (but could) and as a result can act unilaterally.
We speculate WD's arbitration actions could be negotiated against Fab 6 access.
WD's at-cost access to NAND output via partnerships outside of TMC is unlikely, and WD has incurred $12B of incremental debt related to its NAND acquisition so far consisting of the Sandisk brand name, storage system solutions, and minority-based invest-and-purchase manufacturing agreements. We estimate WD needs to invest $1.5-$3B in NAND capex annually.
Adding to the weight on Western’s share price is a note out today from Moody’s analyst Gerald Granovsky detailing why Toshiba’s sale of Toshiba Memory Corp. is credit negative for Western, but a positive for Seagate.
The buying consortium includes two of WDC’s direct competitors – Seagate and SK Hynix (Ba1 positive). WDC currently enjoys a cost and technology advantage over its competitors’ products but that differential will likely shrink if Seagate and SK Hynix get direct access to TMC’s NAND output. As part of its investment in KK Pangea, Seagate will negotiate with TMC a long-term supply agreement of NAND flash, which it currently procures in the spot market and through short-term agreements with various NAND suppliers at much higher prices. By having a captive source of NAND supply, Seagate will gain the cost and supply clarity needed to make incremental investments to grow the SSD side of its business to reduce pressure on declining HDD sales.
Shares of Seagate are up 3% in recent market action to $34.18 a share.
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