Bloomberg News

Sony Costing Shareholders 70% Gain by Clinging to TV: Real M&A

August 01, 2011

Aug. 1 (Bloomberg) -- Howard Stringer, who has overseen a 50 percent decline in Sony Corp.’s value, may cost shareholders a 70 percent gain by clinging to its television business.

Japan’s largest exporter of electronics slashed its profit forecast after saying last week its TV division will lose money for an eighth straight year. Once worth more than $100 billion, Sony has lost half its market capitalization since Stringer became its first non-Japanese chief executive officer in 2005. The Tokyo-based company is now valued at $25 billion, less than a quarter the size of South Korea’s Samsung Electronics Co.

While analysts say Sony may climb 36 percent as sales of its PlayStation game consoles and Cyber-shot digital cameras bolster profit this year, stripping out losses at the TV business from the rest of the company would boost its equity to $43 billion, according to data compiled by Bloomberg. By selling the TV division, Sony would exit a business that is forecast to lose almost a billion dollars this year as consumers unwilling to pay for its Bravia flat-screen TVs turn to cheaper brands.

“It’s been one of the losers,” Keith Wirtz, Cincinnati- based chief investment officer at Fifth Third Asset Management, which oversees $18 billion and owns 40,000 Sony shares through its international equity fund, said in a telephone interview. “It’s hard for me to point to anything material that would suggest a turnaround or improvement.”

By selling the business, “they could redeploy the proceeds to more productive use. That’s the debate I suspect is going on at the senior management and board level,” he said.

Shareholder Value

“The TV business is one of the most important businesses for us and we have never considered to walk out of such business,” said Shiro Kambe, Sony’s chief spokesman in Tokyo, echoing comments that Chief Financial Officer Masaru Kato made to analysts last week. Stringer wasn’t available to comment on the story, Kambe said.

Stringer, a Welsh-born U.S. citizen, became Sony’s CEO in June 2005, taking over the company that invented the Trinitron cathode-ray tube TV in the 1960s and began selling the Walkman portable music player a decade later.

During the past six years, Sony has lost market share to Suwon, South Korea-based Samsung and Apple Inc. of Cupertino, California, as it struggled to win customers by betting demand for online content and 3-D technology would revive TV sales.

Samsung, Apple

Sony has reported net losses in the past three years as companies such as Irvine, California-based Vizio Inc. began making cheaper flat-screen TVs that U.S. consumers favored over Sony’s more expensive models, said Tim Bajarin, president of consulting firm Creative Strategies in Campbell, California.

The company lagged behind Samsung and Seoul-based LG Electronics Inc. in the global TV market last year, with 12 percent of sales, according to DisplaySearch. In the U.S., Samsung and Vizio, founded in 2002, had the biggest share for flat-panel televisions, based on research from IHS iSuppli.

“Flat-panel TVs now are fundamentally a commodity product,” Bajarin said in a telephone interview. “The Vizios of the world came in and cut prices so dramatically to where it made it hard to compete.”

A strengthening yen versus the dollar and euro is also exacerbating Sony’s losses by making its exports less competitive overseas and reducing the yen value of foreign- currency denominated sales.

Generation Gap

Mired in its worst earnings slump since becoming a publicly traded company in 1958, Sony is now valued at 1.96 trillion yen ($25 billion), according to data compiled by Bloomberg. That’s about half what it was worth when Stringer took over.

At the same time, Samsung has grown almost 75 percent to $118 billion, and is now the world’s largest maker of televisions and flat-screen panels.

Apple, which introduced the iPod, iPhone and iPad over the past decade, surged more than 10-fold to become the world’s second-largest company with a market value of $362 billion.

“My generation was willing to pay a premium for that brand,” Jack Ablin, 50, chief investment officer for Chicago- based Harris Private Bank, which oversees $60 billion, said in a telephone interview, of Sony. “They were innovators. They had quality, and they had consumers. But the rest of the world has caught up to them. I’m not sure what their edge is anymore.”

While Stringer, 69, has championed the use of Sony’s televisions to connect other products such as its laptop computers and game consoles to each other and the Internet to increase profitability, the company was forced last week to cut its full-year net income forecast by 25 percent because of weakening TV demand in the U.S. and Europe.

Half-Trillion Yen

Sony, which began offering Internet-enabled TVs in the U.S. in October that use Google Inc.’s software and also introduced 3-D Bravia models last year, said it now expects the loss from its television business to be as large as the 75 billion yen deficit it reported in the fiscal year ended March.

That would push losses at Sony’s TV division past a half- trillion yen since 2004, or more than $5 billion based on historical exchange rates, data compiled by Bloomberg show.

“Consumer electronics makers like Sony tend to have a strong persistence to keep making televisions,” Kazuharu Miura, an analyst at SMBC Nikko Securities Inc. in Tokyo, said in a telephone interview.

While “they believe their brands may be weakened if they stop making TVs,” Miura said, “it’s no longer foreseeable Sony can start making money from the TV business under the current business structure.”

Sum of Parts

After the announcement, Sony’s shares fell to 1,947 yen, approaching its lowest level in more than two years. Today, the stock rose 0.7 percent to 1,960 yen.

While Sony still can’t make any money selling TVs, analysts expect that sales at its digital imaging and games divisions will help the company earn 219 billion yen in operating profit this year. At Sony’s projected market value of 2.65 trillion yen, based on analysts’ average 12-month price estimate of 2,639 yen, the company is valued at about 12.1 times the operating income forecast, according to data compiled by Bloomberg.

Without the losses in TV, Sony’s own projection indicates the company would have made 275 billion yen in operating profit this fiscal year. Using the same earnings multiple, Sony would then be worth 3.33 trillion yen or 3,310 yen a share. That’s a 70 percent increase from last week’s closing price.

A sum-of-the-parts analysis by Yoshiharu Izumi, a Tokyo- based analyst at JPMorgan Chase & Co., shows that Sony is worth 3,000 yen based on next fiscal year’s earnings before interest, taxes, depreciation and amortization, which includes a discount because of the “persistent losses” at the TV business.

‘Need to be Brave’

The company’s value would be more than 3,300 yen a share without the discount, based on Izumi’s estimates.

One of the biggest obstacles to selling the TV business is that its sales are used to pay for expenses such as research and development at Sony’s other divisions, according to Nikko SMBC’s Miura. Losing that revenue would mean earnings at the businesses that are being subsidized may suffer without cost cuts, he said.

The TV unit had 1.2 trillion yen in sales last year, making it the biggest source of Sony’s revenue, data compiled by Bloomberg show. The company will spend 460 billion yen on research and development this year, according to an estimate by JPMorgan, or almost 40 percent of the TV division’s sales.

Net income at Sony will total 86 billion yen this year, analysts’ estimates compiled by Bloomberg show.

“Sales from TV are supporting the company’s overall expenses,” said Nikko SMBC’s Miura. “When that revenue is gone, the company will have to do more drastic cost cutting. You really need to be brave to do that.”

Turnaround Plan

Stringer has already eliminated 30,000 jobs, sold factories and moved production overseas in an effort to revive earnings.

Last March, Sony agreed to sell 90 percent of a TV factory in Nitra, Slovakia, to Hon Hai Precision Industry Co., after disposing of 90 percent of its largest North American TV-making site to Taipei-based Hon Hai. Sony also agreed to sell a TV facility in Barcelona in September.

With Barclays Plc still projecting losses at the TV unit for two more years, Takashi Aoki, who helps oversee about $2.2 billion at Mizuho Asset Management Co. in Tokyo, said there’s little else Sony can do to turn around the business.

Aoki said the TV unit may generate interest from Chinese electronics makers, which have lower production costs and would be attracted to the Sony and Bravia brands. He declined to identify any potential buyers.

“Sony established their premium brand with the high- quality TVs that they produced, but unfortunately that’s become a generic business,” said Harris Private Bank’s Ablin. “From a pure financial basis, it doesn’t make sense for Sony.”

--With assistance from Rita Nazareth and Sarah Rabil in New York, Cliff Edwards in San Francisco, Anthony Palazzo in Los Angeles, Naoko Fujimura and Akiko Ikeda in Tokyo, Jun Yang in Seoul and Tim Culpan in Taipei. Editors: Michael Tsang, Mohammed Hadi.

To contact the reporters on this story: Danielle Kucera in New York at dkucera6@bloomberg.net; Joseph Ciolli in New York at jciolli@bloomberg.net; Mariko Yasu in Tokyo at myasu@bloomberg.net.

To contact the editors responsible for this story: Katherine Snyder at ksnyder@bloomberg.net; Young-Sam Cho at ycho2@bloomberg.net.


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