RPT-Fitch: Loeb's spin-off call not a solution for Sony credit woes

Thu May 16, 2013 5:36am EDT

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May 16 (Reuters) - (The following statement was released by the rating agency)

Third Point hedge fund manager Daniel Loeb's call to spin off 15%-20% of Sony's entertainment businesses is not likely by itself to solve the group's credit weaknesses, says Fitch Ratings. We agree with Third Point that Sony, which is rated 'BB-'/Negative, needs greater focus to improve the core electronics business. However, in our view monetising a small minority of the entertainment business will neither tighten the group's strategic focus nor provide sufficient impetus to transform the electronics business.

While we acknowledge that the equity market may be undervaluing Sony's entertainment business, credit investors have benefitted from the relatively stable cash flows generated by these operations. A partial spin-off would generate capital to pay down debt or invest in new products, but minority dividends would leak from the group's future cash flows.

Sony's restructuring programme is slowly stabilising its credit profile but a return to investment grade is unlikely until it is able to launch market-leading electronics products again. While capital received from an entertainment spin-off should be available to benefit electronics product development, Sony's management has yet to demonstrate that it can deploy such capital successfully - it is a long time since the company launched a "must-have" device - and shrink its portfolio to a manageable range of profitable products.

For example, Sony's management is expecting the TV business to become profitable in the current financial year after nine straight years of losses. We are not convinced that the strategy for higher-end TV products will be a success in the current market. Nevertheless, we believe there remains significant residual consumer affection for the Sony brand, which should help sales should a greater level of focus lead to the company regaining some technological leadership.

A bolder move than Loeb's proposals would be to sell 100% of the entertainment business and other relatively stable non-electronics businesses, principally the 60% held in Sony Financial Holdings (SFH), as neither of these business lines have particular synergy with the core electronics operations. This would certainly focus the group's attention on its core problem in the electronics division, but credit investors would be likely to demand to be repaid because the group's cash flows would become reliant on recovery in the electronics segment, which is far from certain.

The entertainment business has been consistently profitable and cash generative: in the year ending March 2013 (FYE13), it recorded an operating income of JPY85bn, compared with an operating loss of JPY134bn for the electronics business.

SFH remains relatively stable, contributing JPY146bn operating income to Sony in FYE13, and has a significantly stronger credit profile than the rest of the Sony group. However, this business is highly regulated and Sony's ability to receive support from SFH is restricted by guidelines from Japanese regulatory agencies. For example, Sony received just JPY5.3bn in dividends from SFH during FYE13.

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