The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Robyn Mak
HONG KONG, Dec 3 (Reuters Breakingviews) - Bain Capital has a tricky job on its hands. The private equity firm is set to list Japanese memory-chip maker Kioxia six years after leading its bold carve-out from Toshiba. Trouble is, it means poor returns for the sellers. And Kioxia's crippling debt pile may put off potential new investors.
In 2018, a consortium including the U.S. fund, Apple AAPL.O and South Korea's SK Hynix 000660.KS took control of the once-prized asset from its scandal-hit parent for 2 trillion yen, about $18 billion at the time. The leveraged buyout was heralded as a landmark for Japan Inc, not least because of its size, complexity, parties involved and political backlash against foreign control of strategic technology. But Bain managed to pull it off.
Finding an exit has been a grind. A crash in the notoriously cyclical semiconductor market forced Kioxia to shelve initial public offering plans in 2020; a merger with Western Digital WDC.O was nixed last year following opposition from SK Hynix. Bain then revived IPO proceedings a few months back, only to put them on hold after valuation disagreements with global investors, according to Reuters, citing sources.
Now, a listing is on again. Trouble is, the 784 billion yen market valuation, about $5 billion at current exchange rates, is obviously far less than the purchase price six years ago and 20% lower, even, than Toshiba's gain on the sale at the time. It's also half the 1.5 trillion yen Bain was pushing for in October, per Reuters, and values Kioxia stock at just 1.5 times book value as of June, lower than SK Hynix, Western Digital and Micron MU.O, according to LSEG.
The discount is needed, though. Kioxia's 1.2 trillion yen of net debt in June is a whopping 14 times adjusted EBITDA in the fiscal year to the end of March 2024.
True, the company's prospects are improving as memory chip prices rise. But servicing its debt will be a burden, especially with rivals pouring huge sums into new tech and factories. Over the past three-and-a-half years, Kioxia has reinvested just 27% of revenue into capital expenditure, below the aggregate 37% at key rivals, according to analyst Nicolas Baratte who publishes on SmartKarma.
Toshiba and Bain are set to take a loss on the stakes they intend to sell in the IPO, excluding any dividends and fees paid. Perhaps that'll help grease the listing's wheels. Either way, getting the deal done is important to protecting Bain's reputation in what's arguably the world's hottest private equity market.
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CONTEXT NEWS
Japan's Kioxia has set a tentative price range of 1,390 to 1,520 yen ($9.22 to $10.09) per share for its initial public offering, a filing showed on Dec. 2. At the midpoint, it would value the memory-chip maker at 784 billion yen ($5.23 billion).
As part of the IPO, Kioxia plans to issue 21.6 million new shares, which would raise 31.4 billion yen at the midpoint of the range. Owners Toshiba and BCPE Pangea, a fund owned by Bain Capital, will also sell a total of 50.4 million shares at the same price, worth 73.3 billion yen.
The shares are expected to list on Dec. 18.
(Editing by Antony Currie and Ujjaini Dutta)
((For previous columns by the author, Reuters customers can click on MAK/ robyn.mak@thomsonreuters.com))
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