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Anyone prepared to take on the task of turning around a Japanese electronics group likes challenges. But the latest option suggested for Sony has to be one too far: spin off its electronics business. Put another way, that calls for the company to pitch a business which in five years has lost a fifth more than it sold.
In one corner, there is Dan Loeb of Third Point, who wants a partial spin-off of Sony's entertainment unit to fund the rebuilding of electronics, which he says has "considerable and under-appreciated value." Since he first put forward his ideas in May, Sony has gained 7 per cent while the broader sector has lost about the same. In the other corner is Jefferies analyst Atul Goyal, who values the electronics business at zero but thinks it could be floated to fund an effort to boost the entertainment arm's so-so margins. After his report Sony underperformed the Topix.
Both ideas approach the same central issue, albeit from different points: how best to get at the profitable bits while sidestepping electronics and its fast-moving, maturing, ultra-competitive, capital-hungry world. Over a decade, electronics – games, phones, TVs, computers, the lot – have produced about three quarters of Sony's sales, but a net operating loss of 388-billion yen ($4.1-billion). All of the profits have come from just a quarter of the business, namely entertainment – music and pictures – and insurance. The financial division has already been partially floated, since when it has lost a quarter of its value. The Loeb plan is, in theory, the simplest way to profit from the entertainment unit's value – though with operating margins in its movie arm half those at DreamWorks, this needs work.
Meanwhile, Sony is working to staunch the red in electronics. Operating profits are forecast and with the company trading at 35 times expected earnings, someone believes it – and appreciates it, too. But hopes have been dashed before. Setting aside any theoretical value in a spin-off, shareholders might, for now, want to keep hold of the cash from entertainment to buoy them. Just in case.
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