Hedge Funds Bet $5.4 Billion on Toshiba

In order to resurrect the Toshiba Corp., a group of more than 35 hedge funds has invested a collective $5.4 billion to buy new Toshiba shares, the Financial Times reported Monday.

The funds involved include Singapore-based Elliott, Farallon and Effissmo, the fund founded by partners of Japanese activist investor Yoshaiki Murakami.

To save the company from its long-running financial problems and a forced delisting from the Tokyo Stock Exchange (TSE), the deal would theoretically supply enough cash when combined with tax write-offs.  However, a legal battle with Western Digital could either delay or cause the September sale of Toshiba’s memory chip unit to Bain Capital to fall through.

“The problem may come later, when the market sees exactly what leverage Toshiba has given all these foreign funds in exchange for this deal,” a Tokyo-based analyst told the Financial Times. “Once Toshiba is readmitted to the first section of the stock exchange, and the passive money piles back in, these hedge funds are going to hold a very large slab of the voting shares in this company—maybe as much as 50%.”

The agreement would see Toshiba issuing a total of 2.28 billion shares to the funds at a discount price, with the money being raised representing more than half of the company’s current market value. The deal was made possible in October, when Toshiba was removed from the TSE securities watchlist after being there for more than two years following an accounting scandal.

“The beauty of this deal,” one head of the participating hedge funds told the Financial Times, “is that it pretty much completely removes the delisting risk with or without the sale of the chip business. We think it is all upside here—if the sale goes through, Toshiba is flush with cash, if it doesn’t, it could be even better because then it has a great chip business again.”

The share deal is expected to be completed on December 5.