Looking ahead: SK hynix has become the biggest shareholder in Kioxia through an investment vehicle, but that does not mean it can take control of the Japanese flash-memory maker. Any effort to convert that position into voting power would face Japanese government review, potential antitrust scrutiny, and limits set in the original investment agreement.
Kioxia said that BCPE Pangea Cayman2, known as SPC2, owned 14.19% of its shares as of July 31. Toshiba's stake fell to 14.12% after it sold shares in the market last month, putting SPC2 in the top position.
But the ownership change does not give SK hynix a clear path to influence Kioxia's management. SPC2 holds convertible bonds that can be exchanged for Kioxia common shares. The terms allow conversion at any time, which could make SK hynix Kioxia's largest direct shareholder and give it voting rights.
Kioxia warned in its filing that a larger stake held by SK hynix could create conflicts of interest between the two companies. Both are major NAND flash suppliers, and direct ownership of one competitor in the other would raise questions about governance and market competition.
SK hynix would also need prior approval from the Japanese government before converting the bonds and securing voting rights. Japan has increased its scrutiny of foreign investments involving strategic industries, particularly transactions that could give overseas companies greater influence over domestic technology businesses.
The 2018 investment agreement adds another obstacle. SK hynix agreed not to hold more than 15% of Kioxia's voting rights until 2028. While that restriction is nearing its end, any attempt to increase ownership could still require reviews by competition authorities in several countries.
The stakes are high in the NAND market. Samsung Electronics held 29% of global NAND flash revenue in the first quarter, according to Counterpoint Research. SK hynix was second with 18%, while Kioxia held 14%. A closer relationship between the second- and third-largest suppliers would draw attention from regulators and customers across the semiconductor supply chain.
SPC2 was created by Bain Capital as part of the 2018 investment that brought SK hynix into Kioxia's shareholder group. Although Bain set up the vehicle, SK hynix is its investor and has effective control over the position.
SK hynix invested about 3.9 trillion won, or $2.75 billion, in Kioxia through two Bain Capital special-purpose companies. It invested 2.63 trillion won through SPC1, which held an equity position, and 1.3 trillion won through SPC2, which bought Kioxia convertible bonds.
SPC1, led by Bain Capital, exited Kioxia in June. SK hynix did not disclose how much it earned from that investment, though it reported nearly 6.3 trillion won in investment-asset gains in the second quarter. Most of those gains were unrealized.
Selling the remaining position may not be an attractive alternative. Kioxia shares hit a record high of 112,700 yen, or $706.9, in June before dropping by more than half to around 49,000 yen.
The share decline followed Kioxia's loss in a US patent lawsuit against Viasat, concerns over a potential slowdown in NAND demand, and Bain Capital's July exit, which the market viewed negatively.
SK Group Chairman Chey Tae-won said in a July 10 interview with Bloomberg that no decision had been made on whether SK hynix would sell its Kioxia investment or use it as "a strategic leverage."
"It will be difficult for SK hynix to exercise meaningful management control over Kioxia," an industry official said. "It is more likely that the Korean chipmaker will seek to use its stake as strategic leverage in other ways."