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Exclusive: Hong Kong fund tells Toshiba that chip unit sale to Bain group not necessary

By Taro Fuse and Makiko Yamazaki

TOKYO (Reuters) - A Hong Kong-based activist investor in Toshiba Corp <6502.T> has told the embattled conglomerate that the $18 billion sale of its chip unit to a Bain Capital-led group is no longer necessary after its recent capital injection, according to a letter seen by Reuters.

Argyle Street Management Ltd, a hedge fund with $1.2 billion under management, sent the letter to Toshiba's board late on Monday, Chief Investment Officer Kin Chan told Reuters. The fund declined to say how many Toshiba shares it owns.

The first activist shareholder to openly voice opposition to the sale, Argyle is inviting the 30-plus overseas investors who participated in Toshiba's recent 600 billion yen ($5.3 billion) new share issue to team up. It is already in talks with at least three funds who share the same view, Chan said.

While the potential for activist funds to hinder or even scupper the deal with the Bain-led consortium will depend on how many join forces in opposition, Argyle's letter underscores some fears that Toshiba had opened a potential can of worms by tapping activist shareholders in its new share issue.

Toshiba agreed in September to sell Toshiba Memory - the world's no. 2 producer of NAND chips - to the Bain consortium to cover billions of dollars in liabilities arising from its now bankrupt U.S. nuclear power unit Westinghouse.

But to ensure it remains listed, Toshiba also secured the $5.3 billion cash injection from overseas funds this month, which with tax write-offs gives it sufficient funds to cover its liabilities.

Argyle believes "there no longer is any urgency to undertake a sale of Toshiba Memory," it said in the letter, which proposed a meeting with Toshiba's board in either December or January.

The $18 billion price tag for the chip unit "significantly undervalues the business," the letter said, adding that the board should consider instead an IPO for Toshiba Memory.

A Toshiba spokeswoman declined to comment on whether the firm received the letter.

But she said Toshiba is working to complete the sale to the Bain-led group by the end of March "to ensure that Toshiba Memory has the resources it needs to continue to innovate and deliver for a fast-growing flash memory market."

Representatives for Bain were not immediately available for comment.

ACTIVIST SHAREHOLDERS

The new share issue, equivalent to a 35 percent stake in Toshiba, saw some big-name activist shareholders including Third Point LLC and Oasis Management Company take part, although Argyle was not one of them.

Argyle started buying shares in Toshiba over the last couple of months, said Chan. He added that at least two of the funds Argyle is talking to about teaming up with were existing shareholders in Toshiba prior to the new share issue.

Argyle also said in the letter that it believed Toshiba's U.S. nuclear unit Westinghouse still had substantial value and that it was puzzled as to why Toshiba had assigned zero value to its claims against Westinghouse.

The letter argued that as the new share issue had resulted in a major change in the shareholder composition of Toshiba, the board should take into account the views of the new shareholders.

Under the deal with the Bain-led consortium, Toshiba will reinvest in the unit to hold just over 40 percent and together with Hoya Corp <7741.T>, a maker of parts for chip devices, Japanese firms will hold more than 50 percent - a keen wish of the Japanese government.

Toshiba's largest shareholder is currently Singapore-based fund Effissimo Capital Management, established by former colleagues of Japan's best-known activist investor, Yoshiaki Murakami, with an 11.34 percent stake.

The news of a potential new hurdle to Toshiba's chip unit sale comes just another major obstacle looks like it could be resolved.

Toshiba and Western Digital Corp <WDC.O>, its chips business partner which has threatened to try to block the sale, are aiming to have a finalize a settlement to their dispute this week, sources have said.

The settlement under discussion calls for Western Digital to drop arbitration claims seeking to stop the sale in exchange for Toshiba allowing it to invest in a new production line for advanced flash memory chips that is slated to start next year, two sources said.

(Reporting by Taro Fuse and Makiko Yamazaki; Additional reporting by Sam Nussey; Editing by Edwina Gibbs)