Get Ready for This Monster IPO…in 3 Years

Toshiba Memory Corporation is a new, privately owned company formed to acquire Toshiba‘s (NASDAQOTH: TOSBF) storage memory business. The new company was formed via consortium, with U.S. private equity firm Bain Capital leading the way, along with a veritable who’s who of the tech industry.

The new entity is one of only six producers of NAND flash and one of only three producers of hard disk drives, the “new tech” and “old tech” of the storage industry, respectively. With the memory industry booming in recent years, you might be disheartened that one of only a select few manufacturers is going off the market.

But fear not! With the deal recently closing after a year of twists and turns, Bain’s leadership said it plans to take the company public once again…in three years. The unit recently sold for roughly $18 billion, so one can bet that in three years’ time, it could be worth quite a bit more, making it one of the largest IPOs ever.

Don’t know much about Toshiba Memory Corporation? That’s OK — three years is a long time for investors to prepare. You can start right now.

A booming business

The big data and artificial intelligence revolution has led to exploding demand for storage, beyond just the traditional PC and mobile phone markets. According to IDC, the amount of zettabytes created will grow exponentially in the coming years, from just 2 zettabytes in 2010 to a whopping 163 annual zettabytes by 2025.

Making things even sweeter for memory companies, the industry has become fairly consolidated, which has benefited profitability all around in what used to be a violently cyclical business. In fact, prior to its sale, the memory business was Toshiba’s most profitable unit.

Toshiba didn’t want to sell; the conglomerate had to after its Westinghouse subsidiary, which contained its nuclear power plant construction unit, declared bankruptcy due to cost overruns at several U.S. nuclear projects. Toshiba was forced to write off $6.3 billion, leaving the company with more liabilities than assets, thus forcing the company into selling its crown jewel.

An illustrious company

With the stakes so high, several groups vied for this large slice of the memory pie. In fact, there were reportedly as many as 10 initial suitors — a huge number, considering it eventually sold for $18 billion.

When all was said and done, the Bain-led unit prevailed. But while Bain will be mostly calling the shots, with three of five board seats, it won’t be alone. To raise the necessary funds, Bain pooled its capital with an illustrious list of tech companies, including Apple, Dell Technologies, SK Hynix, Seagate Technology, Kingston Tehnology, and Hoya Corp.

Apple, Dell, and Seagate are huge buyers of NAND flash, so their involvement is likely predicated on guaranteeing access to supply, while also preventing suppliers from consolidating further. For Apple in particular, that could be hugely important for costs going forward (and thus, the price of your next iPhone).

Of note,Toshiba repurchased a 40.2% stake in the unit, so it will still own a large part of the memory business, and Hoya’s 9.9% stake enabled the consortium to still be majority-owned by Japanese entities, which was important to the Japanese government.

Even with all this effort, the deal was no sure thing, as Chinese antitrust authorities held things up for months amid the U.S.-China trade spat. But in mid-May, tensions between the two countries relaxed, and the deal was finally approved.

How big could it get?

After the deal closed, Bain Capital’s Japan head, Yuji Sugimoto, said the company would invest heavily in technology, and potentially make more acquisitions, with an eye toward a public offering in three years on the Japanese exchanges.

Private equity firms such as Bain typically use debt to buy distressed assets, get them back in shape, then resell them to the public later on. Since Bain was able to bring on so many partners in this consortium, it’s unclear how much debt it used. However, since the memory business is capital-intensive, it’s possible Bain could use its fundraising prowess to expand research and development, fund capital expenditures, or potentially do a sizable deal with another flash company. “Given our experience in raising money, we can potentially do deals that are very large,” Sugimoto said.

Keep an eye on it

Investors should be aware this future IPO will likely occur on the Tokyo Stock Exchange (TSE). While large foreign stocks sometimes list American Depository Receipts that trade on American stock exchanges, that’s not always the case. If not, you will have to check with your broker to see if they allow trading on the TSE. If they do, the company’s stock will trade in Japanese yen and you will have to be wary of foreign currency swings between your dollars and the yen, adding further complication. Also be sure to check what reporting Japan requires of public companies to get an idea for how you’ll be able to keep up with what is happening with the company.

Still, the story is worthy of your attention. I’ve been very interested in the memory industry recently, as it provides “picks and shovels” to the cloud, AI, and big-data “gold rush.” I’m definitely keeping an eye on the Toshiba consortium’s moves, and in a few years, hope to potentially buy this monster IPO that’s likely coming.

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Billy Duberstein owns shares of Apple and Seagate Technology. His clients may own shares of some of the companies mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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