Face it, Sony, your superhero days are over
Worried investors are asking if the struggling Japanese giant should spin off entertainment unit and focus on electronics
One year and more than £1bn in lost market value later, investors are asking whether it is time for Sony to take Daniel Loeb's advice about breaking up.
Even after making restructuring attempts such as the sale of its personal computer division, shares in the Japanese giant are about 14 per cent lower than when the abrasive activist investor Mr Loeb first urged a spin-off of the entertainment business last May so that the company could focus on its struggling electronicsdivision.
Last week Sony forecast an annual loss, its sixth in seven years, mostly because of swelling restructuring charges.
"Last year there was some hope, and now we're seeing a capitulation of that hope," says Daniel Ernst, an analyst at Hudson Square Research in New York. "The worse the electronics part of the company does, the more pressure there will be to look at Mr Loeb's suggestion".
While Sony is banking on ultra-high definition, or 4K, televisions and high-end smartphones to reverse the declines in its electronics unit, those products won't be the saving grace it needs, Mr Ernst says.
Separating the entertainment division, which makes the Spider-Man films and represents music artists such as Miley Cyrus, would let investors value the more profitable parts of Sony separately while it tries to fix electronics, according to RiverFront Investment.
Calculations by Atul Goyal at Jefferies bank say Sony could be valued at ¥2,090 (£12.2) a share, based on the sum of its parts. It closed yesterday at ¥1,614.
A break-up is "long overdue," Chris Konstantinos at RiverFront says. "You could almost do what I would term a 'good bank/bad bank' type of scenario."
While Sony last August rejected Mr Loeb's calls for it to float off as much as a fifth of its profitable entertainment business, it said in February it would sell its PC business to the buyout firm Japan Industrial Partners and also split its TV manufacturing unit into a separate operating entity. Its chief executive Kazuo Hirai said he has not ruled out a divestiture of that business.
Last week Sony reported a ¥26bn (£152m) operating loss for the TV-making business in the year ended 31 March, which the company said brings the unit's total operating losses over the past decade to about ¥790bn. It also projected a ¥50bn companywide net loss for this year.
Sony's operations sprawl from film and music studios to TV and camera products to PlayStation video games and consoles. It also offers financial services, such as life insurance.
"What do the film entertainment and the audio entertainment businesses have to do really with PlayStation or with TV sets or with camera modules? The answer is not much," says Brian Barish, president of Cambiar Investors, which invests in Sony. "The chorus to break off the entertainment assets from the rest will grow much louder."
A break-up would make it easier for investors to assess the disparate units, says RiverFront's Mr Konstantinos. One way of doing that would be to put higher-growth divisions, including PlayStation and entertainment, in one business and more commoditized operations, like TV, in a "cash cow" business focused on buybacks and dividends, he said.
By splitting a company into two, notes Mr Konstantios, "not only are you allowing shareholders to choose for themselves which sort of investment style they want to pursue, you're also freeing up management."
Sony's electronics business could use the extra attention, adds Mr Ernst of Hudson Square. The cost-cutting and restructuring only go so far and those actions do not solve the problem of reviving revenue.
"What Sony really needs is new product momentum," Mr Ernst says. "Based on what we see now, I don't see that in electronics."
While the company projected a 28 per cent jump in mobile products revenue this year and 17 per cent growth for TV sales, the forecasts are too optimistic, according to Masahiko Ishino, an analyst at Advanced Research Japan.
In smartphones, the company faces competition in the high-end market from South Korea's Samsung Electronics and Apple. Sony accounted for 3.8 per cent of global smartphone sales in 2013, compared with Samsung's 31 per cent and Apple's 15 per cent, according to data compiled by Bloomberg from International Data Corp (IDC).
"They've got competitive threats from many different angles which they didn't have in years past," Ben Bajarin, an analyst at Creative Strategies, says.
Excitement about 4K TV sets – which Sony has touted as central to reviving that unprofitable unit – will weaken as eventually most TVs offer that quality, says Mr Goyal of Jefferies. Those challenges may argue for getting rid of the electronics business altogether, he adds.
Others, such as Lawrence Haverty of Gamco Investors, are more bullish on the electronics business. Industrywide sales of 4K TVs are poised to leap more than 11-fold from 2013 to 2018, according to IDC.
Sony also has already taken steps to get the company on the right track, says Amir Anvarzadeh, at BGC Partners. "For the first time over the last four or five months, I am seeing real signs that the company is doing all the right things," Mr Anvarzadeh says. "You could argue that it's come too late, but we are where we are and the question is, 'How would you restructure this business at this stage?'"
Severing ties between the electronics and entertainment operations now would be a mistake, he adds.
"For Sony to give up its best businesses, its highest cash-flow generating businesses, when it needs it the most, doesn't makes any sense," Mr Anvarzadeh says.
Even so, investors should be allowed to choose which part of the business they want to invest in, says Mr Konstantinos of RiverFront. A break-up could be "the next logical step," he argues. "It seems like the electronics business in general continues to just disappoint.
"After some of the bad quarters they've had, some people were starting to get the idea that maybe all the bad news was priced in. This was sort of a wake-up call. It's ripe for some sort of shake-up."
Additional reporting from Aaron Clark in Tokyo and Angus Whitley in Sydney
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