INVESTMENT ABROAD

China’s Tsinghua to invest US$3.78 billion in data storage company Western Digital in US tech push

PUBLISHED : Thursday, 01 October, 2015, 10:07am
UPDATED : Thursday, 01 October, 2015, 10:07am

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China’s state-backed Tsinghua Holdings plans to buy a 15 per cent stake in US data storage company Western Digital, a deal that could draw regulatory scrutiny amid increased national security concerns.

Tsinghua-owned Unisplendour will invest US$3.78 billion in Western Digital to boost its technology portfolio and get the right to nominate one representative to the US company’s board, the companies said on Wednesday.

Unisplendour will buy newly issued Western Digital shares at US$92.50 each, a premium of about 33 per cent to the stock’s Tuesday close.

Shares of Western Digital, whose revenue has fallen in seven of the past nine quarters, rose over 16 per cent to US$80.74. The company has lost more than a third of its market value this year.

Potential deals between US and Chinese companies stand to face intense scrutiny in both countries as mutual accusations of cyber snooping increase.

US President Barack Obama and his Chinese counterpart Xi Jinping agreed last week to join forces to clamp down on cyber spying, but experts doubt concrete steps will be taken.

Reuters reported in July that Tsinghua was looking to buy Micron Technology, but the deal has not yet materialised amid national security concerns.

Tsinghua is also in the process of buying a 51 per cent stake in Hewlett-Packard’s China-based data-networking business.

The deal will definitely draw the interest of the Committee on Foreign Investment in the United States (CFIUS) despite being smaller than the potential Micron deal, said a former US official who was not authorised to speak publicly.

"Given all the concerns that are out there, they’ll take a close look at any technology company that does business with the Department of Defence," he said.

CFIUS reviews investments that could have national security implications.

The fact that Unisplendour will have a seat on Western Digital’s board means the deal will trigger a review by the CFIUS, said two CFIUS experts who declined to be named to protect business relationships.

Analysts, however, said the Western Digital deal was unlikely to face serious regulatory hurdles because it did not involve a controlling stake.

The investment will help Western Digital establish better relationships with Chinese authorities and give it flexibility to buy back stock and pursue acquisitions.

The cash infusion could allow Western Digital to take bigger steps in flash and solid-state storage, its key interest areas, RBC Capital Markets analyst Amit Daryanani wrote in a note.

Western Digital bought solid-state storage systems maker Skyera last year and Virident Systems, a maker of flash storage for database and cloud computing, in 2013.

Solid-state drives, which are priced higher than hard disk drives, are increasingly being used in PCs, laptops and data centres because of their speed and efficiency.

Unisplendour has agreed to a five-year lock-up on Western Digital shares, during which it would have voting restrictions. Unisplendour’s board representative right will terminate if its ownership falls below 10 per cent.

The deal is expected to close by the first quarter of 2016.

Wells Fargo Securities LLC is the financial adviser to Western Digital for the deal.