Sony Shares Decline After Report Company May Buy Out Venture With Ericsson

Sony Corp. (6758) fell in Tokyo trading after the Wall Street Journal reported the company is nearing an agreement to buy Ericsson AB’s stake in their 10-year-old mobile-phone venture.

The shares dropped 3.7 percent to close at 1,415 yen, the second-biggest decliner in Japan’s benchmark Nikkei 225 Stock Average, which gained 1 percent. Ericsson fell 1 percent to 68.50 kronor at 5:04 p.m. in Stockholm.

Sony is reviewing the 50-50 partnership because the business has become more important for Japan’s largest exporter of consumer electronics with demand for smartphones and computers surging, said a person with knowledge of the matter, asking not to be named because the matter is private. The parents held regular discussions in recent years about the ownership structure of Sony Ericsson Mobile Communications AB, and they may fail to reach a pact, the Wall Street Journal said.

A deal “could amount to a huge financial burden on Sony,” said Hideki Yasuda, a Tokyo-based analyst at Ace Securities Co. with a “neutral” rating on the stock. “There could be a costly fee for using patents reserved by Ericsson.”

Haakan Wranne, a Stockholm-based analyst at Swedbank Markets, said Ericsson’s 50 percent stake may be valued at as much as 1.4 billion euros ($1.9 billion). “The venture doesn’t maximize the potential of Sony’s presence and assets in gaming, and is diluting what could be a bigger profile Sony offering,” he said.

Full Control

“We’re not the source of the information for the report,” Tokyo-based Sony said in a statement. Ola Rembe at Stockholm- based Ericsson and Holly Rossetti at London-based Sony Ericsson declined to comment.

Sony Ericsson has more than 4,000 of its own telecom patents and has a license to all the Nortel Networks Corp. patents that were auctioned this year, Gustaf Brusewitz, a spokesman for the venture, said in August. Both Ericsson and Sony were part of a group, which included Apple Inc. and Microsoft Corp., that agreed in July to pay $4.5 billion for a portfolio of patents from the breakup of Nortel.

Full control of the venture would add smartphones using Google Inc. (GOOG)’s Android system to Sony’s device business, while freeing Ericsson to concentrate on sales of wireless transmission equipment and services. Sony Ericsson already makes a smartphone with a slideout gaming keyboard that works like the Japanese company’s Playstation game system and runs many of the same titles.

Funding Risks

Ericsson carried its share of the venture at 2.4 billion Swedish kronor ($353 million) as of the end of last year, declining from 6.7 million kronor in 2008, according to its annual report.

“‘There is no point” for Ericsson to “remain involved and bear the risk of having to pay additional funds,” said Pierre Ferragu, an analyst at Sanford C. Bernstein.

Sale of the venture would be positive for Ericsson since it would reduce the risk of additional funding obligations, Fitch Ratings said in a statement. Ericsson’s debt is rated BBB+, the third lowest of 10 investment-grade ratings. The Swedish company has guaranteed 2.1 billion kronor of Sony Ericsson’s debt, Fitch said.

Falling Market Share

Ericsson and Sony set up the venture on Oct. 1, 2001, giving themselves five years to dethrone Nokia Oyj (NOK1V) as the world’s biggest mobile-phone maker. Sony Ericsson’s market share slid to 1.7 percent in the second quarter, giving it a ranking of No. 10 among handset manufacturers, slipping from 3 percent a year earlier. It shipped 7.6 million handsets in the second quarter.

Sony Ericsson reported its first quarterly loss in more than a year on July 15. Chief Executive Officer Bert Nordberg said at the time the company was ramping down its feature phone business as the worldwide market for handsets without smartphone software was “collapsing.”

The venture agreement is up for renewal this month, according to London-based CCS analyst Ben Wood. Ericsson hasn’t disclosed the duration of the partnership, spokesman Tobias Gyhlenius said.

Sony Ericsson’s efforts to replace its aging smartphone portfolio with updated models such as the Xperia Arc were delayed by supply-chain disruptions following the Japanese earthquake and tsunami in March.

“This is really the time to divest if Sony is willing to do so,” said Mats Nystroem, a Stockholm-based analyst with SEB Enskilda. “Sony Ericsson’s product portfolio is the best it’s ever had so for a couple of quarters they should show good profitability but in the long run they’re at a disadvantage because of their small scale and would continue to burden Ericsson.”

To contact the reporter on this story: Mariko Yasu in Tokyo at myasu@bloomberg.net. Diana ben-Aaron in Helsinki at dbenaaron1@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net.

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