Shaw Group said it will sell its 20 percent stake in nuclear power plant company Westinghouse Electric Co to Japan's Toshiba Corp to eliminate nearly $1.7 billion of debt and strengthen its balance sheet.

Shares of Toshiba fell more than 7 percent to 2-1/2-year lows on concern about the cost to the chipmaker of buying the stake. Toshiba agreed in principle to such a deal five years ago, before Japan's worst nuclear disaster put a chill on global demand for new reactors.

Shaw shares rallied 7.4 percent to $23.44 in New York, bucking the weakness in the wider stock market.

The sale comes at a time when nuclear energy strategy has been reviewed globally after Japan's nuclear power plants were severely damaged by the earthquake and tsunami that hit the nation's northeast coast in March.

Toshiba, the world's No. 2 maker of flash memory chips, has been under pressure to trim its non-core operations as it readies itself for quake-hit demand in Japan.

The company reported in July an 88 percent fall in quarterly operating profit, blaming a slide in chip prices.

For Toshiba, this (additional stake purchase) will be a burden. They will have to divert resources they would probably want to deploy elsewhere, said Damian Thong, a Macquarie Capital analyst.

I don't think it's such a big problem for Toshiba to borrow money to do this, but it's still an additional burden.

Shaw partnered with Toshiba and Japanese engineer IHI Corp to buy Westinghouse from British Nuclear Fuels Plc for $5.4 billion in 2006. Toshiba bought a 77 percent stake, Shaw 20 percent and IHI 3 percent.

Toshiba's stake fell to 67 percent after the company sold part of the stake to Kazakhstan's state-owned nuclear power company Kazatomprom.

OPTION TO SELL STAKE

Shaw is exercising an option that expires in February 2013 to sell the Westinghouse stake to Toshiba. It said the decision did not indicate it was worried about the future of the nuclear industry.

Shaw has developed experience and expertise constructing nuclear power plants that are unmatched by anyone else in the world. We're committed to building nuclear power plants, CEO and Chairman J.M. Bernhard told a conference call.

Shaw's power business will still work with Westinghouse on four AP1000 nuclear units under construction in China and on six potential new plants in the United States.

Shaw said its decision to sell the Westinghouse stake was driven largely by changes in the value of the Japanese yen, which caused a sharp increase in its yen-denominated debt associated with the original deal.

That debt has increased by about $600 million since October 2006, to a total of $1.7 billion. Paying off that debt increase would wipe out the expected gain from the stake sale, which was estimated at $545 million at the end of August.

Selling the stake will allow Shaw to continue the pursuit of new energy businesses amid the current weak market valuations, Bernhard said.

Founded in 1886, Westinghouse pioneered long-distance and high-voltage power transmission. It also built the reactors for the world's first nuclear submarine and nuclear aircraft carrier.

The stake in Westinghouse generated $24 million in cash for Shaw every year through dividend payments, or a 2.2 percent dividend yield.

Toshiba shares closed down 5.1 percent on Tuesday after dropping as much as 7.3 percent. Volume was heavy, with 82.3 million shares changing hands. compared with the 90-day average volume of 34.4 million. Japan's main stock index was down 2.2 percent.

($1 = 76.970 Japanese Yen)

(Additional reporting by Ayai Tomisawa and Mayumi Negishi in TOKYO, Megan Davies and Matt Daily in New York, Swetha Gopinath in Bangalore; writing by Junko Fujita; editing by Muralikumar Anantharaman, Ian Geoghegan and John Wallace)

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