Reuters reports that Western Digital Corp (NASDAQ:WDC) has asked Toshiba to enter exclusive talks to sell the unit as Toshiba recently announced plans to sell its Memory Business. Pacific Crest completed a scenario analysis which shows that Western Digital could drive significant accretion both with and without a partner in a purchase. Pacific Crest has mixed feelings about the potential transaction because despite the potential positives, it would increase Western Digital's exposure to the volatility of the NAND industry.
Toshiba recently announced the split of its Memory Business and its intention to sell the business. Reuters reports that Western Digital recently sent a letter to Toshiba indicating its belief that a sale to an outside party violates its JV agreement with Toshiba and has asked Toshiba to enter exclusive talks to sell the unit. Pacific Crest therefore thinks it makes sense to examine the potential impact of an acquisition of Toshiba Memory by Western Digital.
Pacific Crest calculated the impact of Toshiba Memory acquisition to Western Digital's EPS over a range of prices and ownership levels. Pacific Crest’s analysis suggests that Western Digital could generate significant accretion assuming a reasonably healthy NAND market, perhaps as high as 17% in an upside case and a $23B price tag; the firm believes the accretion could be as high as 40%+ if the unit goes for $17B. Pacific Crest analysis suggests using a partner would increase the probability of earnings accretion.
There are potential positives from an acquisition of Toshiba Memory, but Pacific Crest thinks the NAND industry will eventually enter a period of oversupply and lesser profitability. As such, the firm could be less constructive on WDC shares in the event of an acquisition as Western Digital would be more exposed to the volatility of the NAND industry.
Western Digital reports FQ3 (March) results Thursday, April 27th. Pacific Crest expects Western Digital to beat Q3 expectations and provide nice Q4 guidance given strong NAND pricing environment and improved PC market. Pacific Crest has raised its earnings expectations to reflect ongoing strength in market demand, Western Digital's public commentary around bit growth expectations, and the benefit of recent debt refinancing.
Western Digital shares trade at 8x Pacific Crest’s CY'18E EPS estimate. The firm’s $96 PT is based on its DCF model. Risks: supply chain disruptions, inventory corrections, lumpy end market demand (particularly amongst Web 2.0 customers), technology risk, competitive risks.