Looks like SanDisk has figured out a way to avoid Samsung’s hostile takeover offer. Toshiba and SanDisk said today that Toshiba will pay $1 billion to gain a larger stake in their joint venture in flash memory chip manufacturing.

Under the deal, Milpitas, Calif.-based SanDisk has agreed to sell 30 percent of the manufacturing capacity of the joint venture to Toshiba, reducing SanDisk’s own capital spending costs. The venture currently operates two chip factories. The extra cash and reduced production will help SanDisk weather a downward spiral in flash memory pricing. Toshiba, meanwhile, is likely to gain market share.

Toshiba said that average annual consumption of memory bits is increasing 200 percent, largely through increasing use of NAND flash memory in cell phones, digital camcorders, solid-state drives for computers, and music players. In case of a market upturn, SanDisk has the option to buy back some capacity. The deal is expected to close in the first quarter of 2009. SanDisk’s stock price is trading at $13.71 a share now. In the joint venture, the two companies split the costs for building the factories and also split the output of flash chips.

A month ago, Samsung made a hostile $5.8 billion buyout offer for SanDisk. SanDisk said the $26 a share offer was too low. The new deal suggests SanDisk has an alternative. But it could also put to rest rumors that Toshiba itself would make an offer for SanDisk. The pricing downturn is so severe that Micron Technology said earlier this month it would lay off 3,000 workers, or 15 percent of its work force.

“Ever since Samsung made public its desire to acquire SanDisk the industry has been abuzz with rumors of a Toshiba takeover,” said Jim Handy, an analyst at Objective Analysis.  “Although the SanDisk-Toshiba partnership would do better without a Samsung acquisition, Toshiba made it clear that a takeover was not in the cards.  This move appears to be [SanDisk’s] alternative.”

SanDisk reports its third-quarter results after the market close today. Analysts expect the company to report a loss of 27 cents on revenue of $778.1 million, according to Thomson Reuters. A year ago, SanDisk reported adjusted income of 54 cents a share on revenue of $1.04 billion.

Update: SanDisk reported a loss (non-GAAP) of 59 cents a share, or $132 million, on revenues of $821.5 million. Falling prices led to a $109 million inventory charge. During a conference call, SanDisk chief executive Eli Harari said the industry continues to experience excessive inventories and weakening balance sheets because of over-capacity. A few years back, industry players built too many factories.

But Harari said “patience will be rewarded” as demand for flash products continues to skyrocket. He said the company expects to cut costs, including laying off employees and existing some businesses, in the coming months. He also noted that SanDisk’s patent portfolio is getting stronger. (A recent ruling against Samsung,in favor of SanDisk, is presumably one reason Samsung wants to buy SanDisk).

The company said it priced more aggressively than it planned to move inventory. In the current quarter, the company predicts “less seasonal lift” in sales in the fourth quarter than in the past. Revenues are expected to be $725 million to $825 million in the quarter. The company expects to lose money through the second half of 2009. Harari said that he expects 770 million handsets will sell with slots for flash memory cards. About three gigabytes is expected average of flash in smart phones. But  he noted that flash memory prices are about as easy to predict as oil prices.

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