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South Korean memory giant SK Hynix has said it opposes a proposed merger of rival chipmakers Kioxia and Western Digital, dealing a blow to Bain Capital’s ambitions to create a US-Japan chip champion.
“We are not agreeing to the merger at this time in light of the impact on our investment asset value,” the company’s chief financial officer Kim Woo-hyun told analysts in a conference call on Thursday. “But we’ll make a decision for all stakeholders, including Kioxia as well as shareholders.”
SK Hynix invested about $3.5bn in the Bain-led consortium that acquired Toshiba’s semiconductor unit, later renamed Kioxia, for $18bn in 2018. The deal remains the biggest buyout in Japan by a private equity group.
But the South Korean company, one of the world’s leading producers of memory chips, has refused to sign off on Bain’s attempts to merge Kioxia with US chipmaker Western Digital over concerns the new company could challenge its position in the Nand memory sector.
“SK Hynix doesn’t want to see a stronger competitor emerge,” said James Lim, an analyst at US hedge fund Dalton Investments. “The merged entity’s market share would be double that of SK Hynix.”
A merger between Kioxia and Western Digital cannot go through without SK Hynix’s approval, complicating Bain’s exit from the largest and most high-profile deal in its history. The deal also requires approval from several countries, including the US, China and South Korea.
Bain shelved plans to list Kioxia in 2020 due to the Covid-19 pandemic and geopolitical uncertainty created by deteriorating US-China relations.
Listing Kioxia would have given an exit for the South Korean group, but people close to the Japanese chipmaker said the recent downturn in the memory sector and continuing losses had closed off that option for now.
Kioxia declined to comment on talks with Western Digital but added it was aiming for an initial public offering at “an appropriate time”. Bain and Western Digital did not immediately respond to a request for comment.
Some analysts have suggested SK Hynix could be convinced to support the merger in order to secure an injection of cash following bruising losses over the past year due to a drop in global demand for memory chips.
The South Korean company reported losses of $2.5bn and $2.1bn in the first and second quarters of 2023, respectively. Third-quarter losses fell to $1.3bn, the company reported on Thursday, with executives expecting the memory chip market to stage a recovery next year.
SK Hynix has also been buoyed by strong demand for the latest generations of its “high bandwidth memory” chips, crucial components in the systems needed to train artificial intelligence models such as OpenAI’s ChatGPT.
“We are sold out on next year’s capacity for HBM3 and HBM3E chips together,” Park Myoung-soo, the company’s head of Dram marketing, told analysts in a conference call.
Lim, the Dalton analyst, said the Kioxia investment “was meaningful strategically because it was able to prevent a key competitor from falling into rival hands, [and also] secured a veto right so it can influence consolidation in the Nand market according to its own interest”.
“But SK Hynix may face a situation where it has to compromise,” he added. “Then it will leverage its veto power to get the best conditions it can.” He added that the Bain deal structure prevented SK Hynix from accessing Kioxia’s technology.