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Matsushita Walks Away From JVC...Not Really

Posted by: Kenji Hall on July 24, 2007

So much for trying to get rid of JVC. Victor of Japan had been a financial albatross for Matsushita Electric Industrial for so long that it only seemed natural for CEO Fumio Ohtsubo to jettison the unit. Analysts encouraged it, investors wanted it, and everyone else thought it was a forgone conclusion. JVC accounts for about 8% of Matsushita’s annual sales, but its $65 million loss weighed on the company’s overall earnings last year. Same for the previous year and the year before that and ditto for this year.

In the end Ohtsubo opted for a compromise solution that goes like this: Take JVC off the consolidated books but keep a stake big enough to have a say in its future.

On July 24, Matsushita announced that JVC would form a capital alliance with Japanese rival Kenwood Corp. Under the deal, Matsushita will issue $165 million of new shares to Kenwood and another $83 million to Japanese fund Sparx Asset Management. That’s a convenient way of lowering Matsushita’s own holdings of JVC to 36.8%, from 52.4%. Kenwood and Sparx will get 10% and 5%, respectively. The JVC-Kenwood business tie-up will begin in October and the two will consider further integration next year.

The deal was Matsushita’s Plan B after a decision in March to unload JVC onto private equity fund Texas Pacific Group got scotched when the fund’s lenders balked.

The impact on earnings? Negative (go figure). For the year ending March 2008, Matsushita’s sales are naturally forecast to decline by 5% to $72.5 billion, from the previous estimate of $76.4 billion. But operating profits are also expected to dip. The company now predicts a similar 5% revision downward to $3.9 billion, from the previous forecast for $4.1 billion.

The main reason for the less-than-drastic move was obviously the breakdown in a sale to TPG. But there also appears to be pockets of opposition within JVC about a tie-up with Kenwood. No self-respecting Japanese CEO would make the executive decision to do what’s best for the bottom line without first consulting the workers directly affected. Who could blame Ohtsubo for trying to avoid a revolt? He’s bought himself time, leaving things ambiguous enough just in case the two sides don’t get along. But investors, who might have preferred a quick solution, will be disappointed. For JVC’s engineers who toil behind-the-scenes to bring us camcorders (popular) and rear-projection TVs (flop) it’s a win. But it could be a pyrrhic victory of sorts. By midmorning on July 25, Matsushita’s shares had lost more than 3% while JVC’s were down nearly 10%. Kenwood had fallen as well, by nearly 2%.

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