Toshiba bets heavily on China in Westinghouse bid
Tue Jan 24, 2006
By Alison Tudor
TOKYO (Reuters) - Japanese electronics conglomerate Toshiba Corp. (6502.T: Quote, Profile, Research) is betting heavily that its plans to buy Westinghouse, a leader in the Chinese nuclear power market, will be justified by strong growth, analysts said on Tuesday.
Concern over the security of power supplies and growing demand worldwide for energy has fueled a surge in crude oil prices, prompting fuel-hungry countries such as China to expand investment in other energy sources such as nuclear power.
For Toshiba, facing a mature market for nuclear plants in Japan and looking to grow a business it sees as a stable profit source, China represents a big opportunity, analysts said.
"China is one of the fastest growth markets for nuclear plants and Westinghouse is one of the largest players in this market. If Toshiba is going to expand, then Westinghouse is a favorable choice," said Takeo Miyamoto, an analyst at CLSA Asia-Pacific Markets.
Toshiba was selected as the preferred bidder for Westinghouse, the U.S. power plant arm of British Nuclear Fuels, the Japanese company said on Tuesday.
It declined to say how much it bid, but a source familiar with the situation said the price was almost $5 billion. That would make the buy the biggest overseas acquisition by a Japanese firm in five years.
In return, Toshiba would get about half the world market in pressurized water reactors. This type of reactor accounts for about 70-80 percent of reactors globally and is the most common in China.
Analysts said that while an acquisition may help Toshiba win contracts in China, the Japanese firm will have to show that the reported price -- more than 10 times Toshiba's estimated group net profit for the year to March 31 and about 2.5 times Westinghouse's revenues -- is justified.
CHINA PLANT BOOM
Currently Westinghouse is in the running for an $8 billion contract to build four nuclear reactors in China, which plans to spend some $50 billion on 30 nuclear reactors by 2020.
"This seems to justify the Westinghouse acquisition from a strategic perspective," said Yoshiharu Izumi, an analyst at investment bank JP Morgan.
"We believe the projected purchase price is high given Westinghouse's earnings and assets," he said, adding that it will be vital to closely watch whether demand actually takes off in China.
Analysts will also be watching how Toshiba would pay for the planned acquisition, as it would face high interest costs if it uses debt financing or dilution risks if financed with an equity offering.
Standard & Poor's Ratings Services on Tuesday placed its "BBB" long-term and "A-2" short-term ratings on Toshiba on CreditWatch with negative implications following the announcement on Westinghouse.
Toshiba is already burdened with heavy capital investment programs for chips and flat TV panels of over 200 billion yen ($1.75 billion), and the Nihon Keizai business daily said Toshiba is seeking partnerships with trading companies Mitsui & Co. (8031.T: Quote, Profile, Research) and Marubeni Corp. (8002.T: Quote, Profile, Research) to lessen the financial burden.
The two firms, keen on the overseas power generation business, are expected to accept the offer, the paper said.
If Toshiba finalizes the Westinghouse acquisition, it would be the biggest acquisition by a Japanese company since NTT DoCoMo Inc. (9437.T: Quote, Profile, Research) bought AT&T Wireless in November 2000, according to financial data provider Dealogic.
Japanese firms retrenched after an asset bubble popped in the early 1990s, but as the economy shows signs of recovery they are once again expanding cautiously abroad. Acquisitions of foreign assets by Japanese firms hit a 15-year high in 2005.
($1=114.55 Yen)
(Additional reporting by Yuka Obayashi)
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