If the sale of Westinghouse to Toshiba goes through as expected, Westinghouse’s nuclear business will have changed hands twice in the last eight years. Add to this the sale of its power generation business to Siemens in 1998 and you get the feeling that Westinghouse is the prize in a party game of pass the parcel.

British Nuclear Fuels (BNFL) paid $1.2 billion in 1998 for Westinghouse, and it was expected that the sale would fetch $2-3 billion. Toshiba reportedly paid nearly $5.4 billion – high, yet not substantially higher than the bids of its rival bidders GE and Mitsubishi. I guess it proves the point that an item is worth whatever someone is prepared to pay for it.

The deal surprised many analysts who claim that at 2.5 times Westinghouse’s revenues, Toshiba seems to have paid above the odds. There are also doubts over whether the deal truly makes financial sense for Toshiba at this point in time.

With the cost of Westinghouse around 10 times Toshiba’s expected group net operating profit to March 31, the purchase may put considerable strain on the company. Toshiba is burdened with heavy capital investment programmes for microchips and flat panel TVs. It is also facing a potentially long battle with Sony over the next generation of DVD players in its core consumer electronics market. Following the announcement that Toshiba was the preferred bidder, Standard & Poor’s placed its “BBB” long term and “A-2” short term ratings on Toshiba Corp. on Creditwatch with negative implications.

So why was Toshiba prepared to stake so much on securing the deal? Clearly it is gambling on the future prospects of the nuclear market. The US, China, India and possibly the UK could all offer significant opportunities.

In the US there are 103 licensed reactors in operation that generate 20 per cent of the nation’s energy supply. At the end of 2004, the US Department of Energy announced that under its Nuclear Power 2010 Programme, it would share industry costs for preparing an advanced reactor design for license approval by the Nuclear Regulatory Commission (NRC). The DOE’s goal is to be ready to begin construction on the first US advanced reactor by 2010. New nuclear power plant license applications are currently being prepared for two sites under the NuStart Energy programme. One application will be developed for the Westinghouse AP1000 PWR design for the two units at the TVA Bellefonte site in Alabama. The other application will be developed for the GE ESBWR at the Entergy Grand Gulf site in Mississippi. The application for the Westinghouse design is scheduled for submittal to the NRC for review in October 2007, while the GE design is scheduled for submittal in February 2008.

But the biggest lure is China. China plans to increase its nuclear installed capacity from around 8.7 GW at present to 36 GW in 2020. This translates to around $2-3 billion a year on nuclear for the next 15 years. In an interview with the Financial Times, Masao Niwono, chief executive of Toshiba’s nuclear arm said: “If they succeed in China, we will assist their strategy. But if they are not able to get business outside the US, we will have to rethink the strategy.”

Westinghouse has a track record in China. In 1995, it became the first US company to gain a foothold in China’s nuclear power sector when it was awarded a contract to supply two 650 MW steam turbines for the Qinshan nuclear power plant. Since then it has also supplied components for various nuclear plants in China.

Buying Westinghouse could put Toshiba in line for an almost immediate return on its investment. Westinghouse is the front-runner to win an $8 billion contract, expected to be announced shortly, to supply four 1000 MW reactors. In any event, Toshiba is likely to reap the benefits of owning Westinghouse technology and expertise. In addition to being the most common type of reactor in China, PWRs also account for 70-80 per cent of reactors globally. Westinghouse also services half of the world’s installed base.

Toshiba is now conducting additional due diligence as a formal step towards a final contract which the parties expect to sign next month (February). The Westinghouse purchase still needs to be reviewed by regulators in the US and in the EU and may take another six months to get the green light.

Toshiba has said it plans to run Westinghouse as a separate business for the next few years, saying it would make minimal changes among employees and senior executives. This will ease the ‘pass the parcel’ feeling for employees. For Toshiba, let’s hope banking on China so heavily does not prove to be its undoing. The Chinese government may say that 30 GW is needed but other forecasts, for example from the IEA, give a much lower figure. It would not be the first time that we have seen China over-estimate what is needed. If this happens, Toshiba may find that the Westinghouse parcel is more wrapping than gift.

Junior Isles
Publisher & Editorial Director