Bloomberg News

Sony, Sharp Losing $11 Billion Leaves Investors Let Down

April 10, 2012

Sony had a record loss of 520 billion yen for the year ended March 31, more than twice what it had predicted in February, after taking a charge to write down deferred tax assets.

Sony had a record loss of 520 billion yen for the year ended March 31, more than twice what it had predicted in February, after taking a charge to write down deferred tax assets.

Sony Corp. (6758) and Sharp Corp. (6753) posted losses that together equaled 900 billion yen ($11 billion) as the first decline in global TV shipments in six years and a stronger yen eroded earnings at Japan’s biggest LCD TV makers.

Sony had a record loss of 520 billion yen for the year ended March 31, more than twice what it had predicted in February, after taking a charge to write down deferred tax assets. The stock fell the most in five months in Tokyo trading. Sharp also declined after posting a record loss of 380 billion yen, 31 percent more than its earlier forecast.

The two companies, once symbols of Japan’s dominance in electronics, have been hammered by Apple Inc. and Samsung Electronics Co. (005930), a currency that reached a postwar high and prompted government intervention, and the aftermath of last year’s quake and Thai floods. Sony’s new President, Kazuo Hirai, may have to raise equity and cut jobs while Sharp has turned to Taiwan’s Foxconn Technology Group (FOXCGZ) for a $1.6 billion infusion.

“Investors have kept hoping for their revival and have been repeatedly let down,” Einosuke Yoshino, a fund manager at Commons Asset Management in Tokyo, said today by phone. “They make slow decisions and have weak leadership. I no longer believe them.”

Sony fell 4.8 percent, the most in intraday trading since Nov. 10, to 1,510 yen as of 10:51 a.m. in Tokyo. It was the second-biggest decline among more than 1,600 companies in the MSCI World Index. (MXWO) Sharp dropped 3.2 percent to 513 yen while Japan’s benchmark Nikkei 225 Stock Average lost 1.2 percent.

‘Nothing Is Sacred’

The cost of insuring Sony’s bonds against non-payment for five years jumped by 36 basis points to 222 yesterday, the highest in more than three years, according to CMA, which is owned by CME Group Inc. and compiles prices in the private market.

“The situation is critical and we will carry out drastic reform. Nothing is sacred,” Sony Chief Financial Officer Masaru Kato said yesterday in Tokyo, where the company is based. “Turning around our TV business is a top priority.”

Sony took a 300 billion-yen charge to write down the value of deferred tax assets as the company no longer expects to be as profitable as it had once forecast. The company may raise financing with equity, according to Kato. It has not made any specific plans to do so, he said.

“Given the tax charges, Sony’s revival and growth plans in the U.S. don’t seem to be working out,” said Satoshi Yuzaki, a general manager at Takagi Securities (8625) in Tokyo. “The market is very skeptical about the outlook for the company over the next three to five years.”

‘Race to the Bottom’

Sony and Osaka, Japan-based Sharp have been trying to reach consumers willing to pay high prices for televisions with LED, or light-emitting diode, sets. Sharp, for instance, reintroduced the Elite brand it licensed after Pioneer Corp. left the TV market.

Phil Molyneux, president of Sony’s U.S. electronics business, is focusing on improving consumers’ retail experiences. On April 1, the company instituted a “unilateral pricing policy” that limits how much a retailer can mark down Sony’s products. The move will “slow the race to the bottom,” he told reporters at a briefing in March.

Sony also is accelerating its redesign worldwide of company-owned stores to deliver a shopping experience similar to what Apple (AAPL:US) provides at its retail outlets.

Strong Yen

The modest gains Sony has seen from such moves have been hobbled by the strong yen, Molyneux said.

The yen’s 7.3 percent surge against the dollar and 11 percent gain against the euro in 2011 damped the repatriated value of Japanese companies’ overseas sales. Sony earned 70 percent of its revenue outside Japan and Sharp 47 percent.

Manufacturers have been forced to both relocate production outside of Japan and to press their suppliers for cost cuts. Interventions by Japan’s finance ministry and the Bank of Japan helped bring the currency down from October’s postwar high against the dollar.

The preliminary loss underscores the challenge for Hirai, 51, in turning around the company that set the trend in electronics during the 1980s with products like the Walkman music player. Hirai, who succeeded Howard Stringer this month, has said he will close down less-competitive businesses and cut costs to revive Sony. The company predicted operating profit of 180 billion yen for the fiscal year that began this month.

10,000 Job Cuts

“What they’re doing now is trying to squeeze out profits with cost cuts,” said Ichiro Takamatsu, who helps oversee $2 billion at Bayview Asset Management Co. in Tokyo. “I can’t see a scenario in which they boost their top line. The environment is still severe, demand for TVs won’t recover, and they’ve got no hit products.”

Sony will cut jobs at its television unit, according to a person familiar with the situation. The company may eliminate as many as 10,000 positions, according to the Nikkei newspaper. Sony will give a briefing on its turnaround plan tomorrow, Kato said, declining to elaborate on the number of job cuts.

“Sony’s share price will be determined by whether or not it announces something worthwhile on Thursday,” Kazuharu Miura, an analyst at SMBC Nikko Securities Inc. in Tokyo, said today by phone. “It needs a business development and restructuring plan that the market can appreciate.”

Miura reiterated his underperform rating on the stock yesterday and his share-price estimate of 1,500 yen.

Sony’s loss is the worst since the company was founded, according to Mami Imada, a spokeswoman. Including yesterday’s announcement of the 520 billion-yen loss, Sony lost a combined 919.32 billion yen in the past four years, according to data compiled by Bloomberg.

TV Shipments Fall

Global TV shipments last year fell for the first time in six years because of excessive inventory in the U.S. and Europe, and the end of Japanese government subsidies for purchases, according to DisplaySearch, part of NPD Group. Shipments fell 0.3 percent to 247.7 million units, the researcher said.

Samsung and South Korean competitor LG Electronics Inc. both increased their share of the global flat-panel TV market in the fourth quarter while Sony, Panasonic Corp. (6752) and Sharp all posted declines, according to DisplaySearch.

Suwon, South Korea-based Samsung last week reported a record first-quarter operating profit of 5.8 trillion won ($5.1 billion) on gains from selling phones and TVs.

Sony, worth more than $125 billion in 2000, is now valued at less than $19 billion, compared with $586 billion for Cupertino, California-based Apple and $168 billion for Samsung.

New Team

The new CEO, who’s been credited with making the PlayStation game business profitable, is bringing in a new team and has put himself in charge of Sony’s TV business, which is forecast to lose money for an eighth consecutive year.

Hirai has already taken action in an effort to boost the TV business. Last year, Sony exited a panel-making venture with Samsung, saying the sale of that stake to the South Korean company will save about 50 billion yen in costs for Sony’s TV operation.

Sharp’s preliminary loss also was its worst since the company was founded a century ago. The company has cut production of TV panels at its two biggest LCD plants as demand has failed to meet supply. The company’s factory in Sakai has a production capacity of 72,000 panels a month, while its LCD plant in Kameyama, Mie, is capable of making 100,000 panels.

‘Too Optimistic’

“Our previous forecast was too optimistic,” Tetsuo Onishi, an executive managing officer, said during a press conference in Osaka. “Sales are still bad.”

The cost of insuring Sharp’s debt against default jumped 15 basis points to 281.7 basis points as of 4:30 p.m. yesterday in Tokyo, according to data provider CMA. That’s the highest level since March 23, CMA prices in Tokyo show.

Last month, the company turned to Foxconn for help. The Foxconn group, including Taipei-listed flagship Hon Hai Precision Industry Co. (2317), will buy 9.9 percent of Sharp for 66.9 billion yen in a new-share sale. Foxconn Chairman Gou and related investment companies will buy 46.5 percent of Sharp Display Products Corp., a venture with Sony Corp., for 66 billion yen.

The deal, the largest Japanese investment by a Taiwanese buyer, includes an agreement to purchase as much as 50 percent of Sharp Display’s LCD panels.

Standard & Poor’s cut Sony’s credit rating one level in February to BBB+, S&P’s third-lowest investment grade, because of falling prices, waning demand and tougher competition. The announcement followed downgrades by Moody’s and Fitch Ratings, which cited difficulty in turning around the unprofitable TV business.

To contact the reporters on this story: Mariko Yasu in Tokyo at myasu@bloomberg.net; Shunichi Ozasa in Tokyo at sozasa@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net


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