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May 16 (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
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.