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The Honolulu Advertiser
Posted on: Sunday, February 26, 2006

Toshiba risks all on nuclear option

Associated Press

Chief executive Atsutoshi Nishida's Toshiba Corp. will be the world's biggest nuclear power company if U.S. regulators approve its purchase of British-owned Westinghouse, once an iconic American company.

ITSUO INOUYE | Associated Press

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TOKYO The head of To-shiba had good reason to sound a trifle defensive about his company's $5.4 billion purchase of U.S. nuclear power company Westinghouse.

After all, almost every other high-profile Japanese buyout in the U.S. has turned out badly.

"I'd like to make this the first success story," Toshiba CEO Atsutoshi Nishida said after the announcement earlier this month that the electronics company will buy Westinghouse Electric Co. from British Nuclear Fuels PLC.

The move signals the determination of Toshiba, already a leading builder of nuclear power plants, to make nuclear energy one of its pillars along with computer chips and electronics. Toshiba has built 22 nuclear power plants in Japan since entering the business in 1966, and is building another one here and two on Taiwan.

By acquiring Westinghouse, Toshiba becomes the world's No. 1 nuclear power company, with a 28 percent share in the global market, Nishida said.

With soaring oil prices, experts say, nuclear energy is becoming a more attractive option in the U.S. and elsewhere, despite its safety concerns.

In particular, the company is betting China's nuclear power market will balloon. Toshiba has not built a nuclear plant yet in China but runs operations in 63 locations there, including sales outlets, distribution centers and production plants, employing 20,000 people.

Still, there are numerous question marks about the deal.

For one, many believe Toshiba overpaid for Westinghouse. The expected price had been about half the final price. British Nuclear Fuels paid $1 billion when it bought the company in 1999.

"It was a far too expensive purchase," said Kota Ezawa, analyst at Daiwa Institute of Research in Tokyo. "Nuclear energy is a profitable business, but even considering that, it wasn't a good deal."

Toshiba shares slipped on the deal but have recovered on news that the company is boosting investments in flash-memory computer chips. Its stock is trading at about $5.60 lately.

Standard & Poor's and Moody's Investors Service placed Toshiba under review for a possible downgrade, warning that it had paid too much and that the deal may endanger its financial status.

Toshiba says it will recoup its investment in 15 or 20 years. It plans to maintain at least a 51 percent stake in Monroeville, Pa.-based Westinghouse, and is in talks with several companies for minority stakes.

Yuichi Ishida, analyst at Mizuho Investors Securities in Tokyo, says it's hard for investors to assess a deal that will take so long to produce profits, and questions the wisdom of channeling profits from its booming flash-memory chip business to nuclear energy.

"Toshiba is investing the money it has earned from a highly profitable business and investing it in nuclear power, which is far more questionable in profitability," Ishida said.

Also, the deal could fail to win regulatory approval.

As a Japanese acquisition, it needs approval from the Committee on Foreign Investments in the U.S., a panel in the Treasury Department that scrutinizes such deals.

The Japanese press is speculating that the U.S. government would have preferred to see Westinghouse go to General Electric Co., which bid unsuccessfully against Toshiba.

Toshiba says the deal is expected to be finalized by fall. Nishida expressed confidence about obtaining approval from Washington, saying that nuclear power plants don't involve using sensitive defense technology.

But there's plenty of skepticism because such issues tend to be political and complex.

"Nuclear energy involves national policy, and it's not going to be as simple as selling other products," said Yoshihide Otake, analyst with Shinko Securities Co. "Toshiba certainly has many hurdles left to clear."

In 1988, the United States banned U.S. government procurement of Toshiba products because the company sold submarine-silencing equipment to the Soviets in violation of an international agreement to keep high-tech equipment with military uses out of communist hands.

Japan's top business daily Nihon Keizai Shimbun pointed to General Electric's lobbying power as a defense contractor and powerful U.S. energy, financial and media group.

"It is possible the U.S. government may not approve the deal," the newspaper said in a recent commentary. "The presence of GE, which has deep ties with the U.S. government, cannot be ignored."

Adding to the fears is the poor record of Japanese companies' investment forays into the U.S. especially for reputable names like Westinghouse, associated for more than a century with businesses in home appliances, mass media and energy. The company now operates as a nuclear power plant company.

Some Japanese fear the venture may prove as disastrous as Sony Corp.'s buyout of Columbia Pictures or Mitsubishi Estate Co.'s snapping up Rockefeller Center.

A more recent blunder was NTT DoCoMo's investment in AT&T Wireless, announced in 2000, which merely racked up losses for the Japanese mobile carrier. NTT DoCoMo sold its 16 percent stake to Cingular Wireless in 2004.

"It's hard to say how Americans will see a Japanese ownership of Westinghouse," said Ishida, the analyst. "It's a name that is said to be close to American people's hearts."