By Makiko Yamazaki and Greg Roumeliotis
(Reuters) - Toshiba Corp said it may have to book several billion dollars in charges related to a U.S. nuclear power plant construction company acquisition, sending its stock tumbling 12 percent and rekindling concerns about its accounting acumen.
The Japanese group said cost overruns at U.S. power projects handled by the CB&I Stone & Webster Inc business it acquired last December from Chicago Bridge & Iron Company NV (CB&I) would be much greater than initially expected, potentially requiring a huge writedown.
Toshiba's announcement came as its Westinghouse Electric Company subsidiary is engaged in a legal and accounting row with CB&I, which has argued in court that it expected a relatively small payment from Westinghouse of only $161 million when the deal closed on the understanding that the latter was taking on a challenged business.
Toshiba's latest writedown would be another slap in the face for a sprawling conglomerate hoping to recover from a $1.3-billion accounting scandal, as well as a writedown of more than $2 billion for its nuclear business in the last financial year."This will come as an additional shock to Toshiba's institutional investors that may further undermine confidence in company management, as well as significantly weakening its international nuclear credentials," said Tom O'Sullivan, founder of energy consultancy Mathyos Japan.
O'Sullivan noted the acquisition in December 2015 coincided with the finalizing of a record fine by Japanese regulators for accounting irregularities at Toshiba, indicating that corporate governance controls were extremely weak.
Toshiba Chief Executive Satoshi Tsunakawa, who only took the helm in June after his predecessor embarked on a series of restructuring steps to clean up Toshiba's books, said the conglomerate would look at some kind of strategy to boost capital.
"We would have needed to boost our capital base anyway because our shareholders' equity ratio is low," he told a news conference.
As of end-September, Toshiba had shareholders' equity of 363 billion yen, or just 7.5 percent of assets, which could fall close to zero if the company is forced to log significant losses.
Asked if Toshiba's liabilities would exceed its assets, Chief Financial Officer Masayoshi Hirata said the company had not yet completed its estimation of the charge.
It would finalize that by mid-February, he said, adding that the conglomerate would explain the situation to its main banks and seek their support. Toshiba's main lenders are Sumitomo Mitsui Financial Group Inc and Mizuho Financial Group
Toshiba has positioned its nuclear and semiconductors businesses as key pillars of growth while seeking to scale down less profitable consumer electronics units such as personal computers and TVs.
But Toshiba could revise the positioning of its nuclear business if need be, said Tsunakawa, who has been credited with having shaped a medical equipment unit into a major earnings driver. The unit was sold to Canon Inc this year.
Tsunakawa added that asset sales or a potential listing of its cash-cow flash memory chips division were options that could be considered.
DEAL OF DISCORD
The deal between CB&I and Toshiba's Westinghouse division has been fraught with disagreement since at least July.
Clashing over who should shoulder potential liabilities related to cost overruns and over calculations for net working capital for the unit, CB&I sued Toshiba's Westinghouse division after Westinghouse said it was owed more than $2 billion.
Delaware's Chancery Court earlier this month dismissed the CB&I lawsuit, which accused Westinghouse of making claims in bad faith by seeking to use an arbitration process on net working capital of the nuclear construction business to eliminate liabilities it should have inherited by closing the deal.
CB&I has since launched a legal appeal that is pending. A Westinghouse spokeswoman reiterated on Tuesday that the company expected the issue to be decided by an independent third-party auditor pursuant to the terms of the deal with CB&I.
"Both the (CB&I legal) appeal and the independent auditor process are expected to be determined in 2017. CB&I will continue to defend its position vigorously in both processes," a CB&I spokeswoman said.
CB&I received no upfront payment for the sale of the nuclear construction business, but stood to receive earnouts based on the progress of the completion of two U.S. projects by Stone & Webster: a nuclear power plant in Georgia for Southern Co and two reactors in South Carolina for SCANA Corp.
CB&I and Westinghouse were consortium partners building those reactors prior to their deal for Stone & Webster, which was meant to resolve disagreements over each contractor's responsibilities over the projects.
As of Sept. 30, CB&I had incurred an after-tax goodwill impairment charge in 2016, as a result of the sale of its nuclear operations to Westinghouse, of $904 million. In 2015, it incurred another $1.1 billion after-tax impairment charge.
Shares in Toshiba, which remains on the Tokyo bourse's watch list due to concerns about internal controls, finished 12 percent lower, giving it a market value of around $14.2 billion. CB&I shares were flat in afternoon trading in New York on Tuesday at $34.19.
Prior to Tuesday, Toshiba had forecast a full-year net profit of about 145 billion yen this financial year, a turnaround from a loss of 460 billion yen, thanks to strong demand for flash memory chips from Chinese smartphone makers.
Masahiko Ishino, an analyst at Tokai Tokyo Research Center, said the focus may soon shift to whether Toshiba will divest some of its businesses if the latest loss wipes out its shareholders' equity.
"There will be a lot of companies that want to buy Toshiba's businesses," Ishino said. "It is possible that its NAND flash memory business would attract various buyout offers as there are few players in the market," he said.
(Additional reporting by Aaron Sheldrick, Ayai Tomisawa, Yoshiyuki Osada and Chris Gallagher in Tokyo, Tom Hals in Wilmington, Delaware, and Aparajita Saxena in Bengaluru)