Analysis: Sony Corp. eyes asset sales to focus on hardware

Conglom may shed Gracenote, DADC units but sez studio not for sale

Sony Corp. of America chief Michael Lynton recently repeated what has become the company’s mantra over the past few months: “The studio is absolutely not for sale,” he told CNBC last week.

But some assets at Sony Corp. are quietly going on the block, including U.S.-based disc manufacturer DADC and online music data service Gracenote, according to multiple sources. Insiders say that the Japanese parent company is looking to shed a number of non-core assets as it redoubles efforts to revitalize its long-struggling electronics businesses.

A Sony rep said the company would not comment on speculation.

While SPE does not appear to be for sale at the moment, some insiders expect that the studio and the Sony Music Entertainment division could be on the block in the next year if Sony Corp. chief executive Kazuo Hirai decides that the company needs cash to stave off financial pressure and focus the conglom squarely on reinvigorating its core hardware biz.

Hirai has staunchly denied that Sony Pictures is currently for sale, saying there was “no truth” to the sale talk back in October. But after a decade of weak results in the core consumer electronics businesses, Hirai may eventually face pressure from shareholders and Sony’s board to streamline operations and channel all energies into fixing the problem areas on the hardware side.

Since Hirai took the helm last year, Sony has been less vocal about the strategy of leveraging the Hollywood assets to help drive the electronics business — the game plan articulated by Hirai’s predecessor, Howard Stringer.

But there’s also a dilemma for Sony in considering the sale of Sony Pictures and Sony Music. Those divisions and the financial services unit are among the few that reliably turn a profit for the corporate giant. Industry observers have valued the studio and music wing together at about $13 billion. The two account for about 16%-17% of Sony’s revenue but far more of its earnings.

Sony Corp.’s market cap as of Friday was $14.4 billion — a sign that investors have little confidence in the near-term performance of its hardware businesses, considering that Sony in 2001 had a market cap of $55 billion. Sony reported $22.4 billion in revenue for the quarter ended Dec. 31 but only $534 million in operating income, boosted in part by one-time charges. Sony has pledged to investors that it will return to profit in its TV set manufacturing biz by the time its 2013 fiscal year ends in March 2014.

The urgency to show that progress is being made is spurring the chatter about large-scale asset sales.

“Technology, software, services, the movie studio and music, consumer electronics. Sony has that under one roof. The potential of that is still there, but they haven’t executed on it. They lack a hit product,” said Daniel Ernst of Hudson Square Research, one of the few U.S. analysts to follow Sony Corp.

Ernst praised the recent $1.1 billion real estate sale of Sony’s U.S. headquarters at 555 Madison Avenue, which he said “doubled the cash balance of the parent company.” Sony sold off its former head office in Tokyo in 2006.

Sale rumors have dogged the studio for years because Sony never achieved the synergies it hoped for between hardware and software. Meanwhile, Sony’s electronics business plummeted, overtaken by lower-cost rivals and the lack of a transformational product like the Walkman that put it on the map in the 1970s. The stock plummeted, and the company found itself with dismal earnings and in need of cash.

Sony has been approached numerous times in recent years with offers to buy Sony Pictures Entertainment — which means the company knows it can count on a sale to drum up cash when the time comes. CBS, Viacom and Discovery Communications have been mentioned as prospective suitors, among others.

Sony Pictures has taken steps to rein in its use of capital to help its parent company. Last year, SPE execs confirmed the studio would cut development spending by 10% and make two fewer films per year. Meanwhile, SPE’s television production and distribution unit has grown to account for as much as 65% of the studio’s revenue, and as much of its earnings. Neither Gracenote nor DADC are core to Sony Pictures Entertainment activities. Both are technically part of Sony Corp. of America, which has been talking to potential investors for several months about a sale of DADC, according to sources. Some observers have speculated that Gracenote, which supplies data to a number of music retailers including iTunes, could fetch up to $100 million, while DADC might go for somewhere around $200 million.

Sony was said to have eyed Canadian disc manufacturer Cinram before its eventual sale to private equity firm Najafi Companies last year. That purchase would have allowed Sony to achieve greater scale in the physical disc manufacturing world amid continued declines in disc sales. Without that market share, some speculate that overhead costs may have contributed to Sony’s interest in selling the company.

Insiders caution that no deal for either Gracenote or DADC is imminent, and Sony Corp. doesn’t appear to have hired an investment bank to shop the assets.

The rising yen has boosted Sony shares in recent weeks, and some insiders see hopeful signs in the television set and mobile phone businesses. Sony is predicting a profit for the fiscal year that ends in March. But even a nascent recovery may be too early to call.