Sony Financial Arm Bent On an IPO

The Japanese electronics maker plans to spin off its insurance and banking entity. What will it do with the cash influx?

Americans have long been acquainted with Sony through its TVs, DVD players, and the once-ubiquitous Walkman. In Japan, though, the Sony (SNE) brand also extends to insurance and banking. Now the consumer-electronics and entertainment giant is gearing up to spin off that business in an initial public offering that could be one of the year's biggest.

An IPO of Sony Financial Holdings, which could take place as early as this summer, could raise $4 billion, analysts estimate. "In the past we've said it would take place in 2007 or later," said Chief Financial Officer Nobuyuki Oneda at Sony's third-quarter earnings announcement Jan. 30. "That hasn't changed."

A Choice to Make

What has changed is that analysts are formulating their own ideas about how Sony should spend the cash. The most popular idea: Reinvest it in Sony's core consumer-electronics business. Thanks to Chief Executive and Chairman Howard Stringer's reforms and his laser-like focus on making Bravia liquid-crystal-display TVs profitable, the electronics unit finally appears poised for growth after struggling the last three years. Sony promises the hemorrhaging from LCD TVs will end soon, while other gizmos, such as Cybershot digital cameras, are helping to boost profits.

Signs of the Stringer effect abound. Though Sony's third-quarter operating profit dropped 15% to $1.47 billion on a 9.8% gain in sales to $21.5 billion, the figures exceeded analysts' expectations. The reason? Signs of life at the electronics unit. It posted a quarterly profit of $1.46 billion, a 2.8% gain from the previous year.

Thanks partly to the weaker yen, Sony also revised upward its group operating profit forecasts for the fiscal year ending in March to $496 million, from $413 million. Last fiscal year, the company posted an operating profit of $1.87 billion. Despite the dip in earnings this year, Goldman Sachs (GS) analyst Yuji Fujimori thinks Sony's group profits could quadruple next year and surge another 50% the following year.

Perfecting The Timing

In recent months, Stringer has been green-lighting asset sales to free up cash so he can rebuild the company around a tighter core of businesses. In December, Sony sold part of its 49% stake in retailer StyleLife Holdings to a group of investors. Next on the list is Sony Financial Holdings, which has been part of the company since 1979.

Sony won't want to go ahead with an IPO until after it reports earnings for the fiscal year ending this March, which means the sale will take place in August or September at the earliest, says Takashi Nishibori, editor-in-chief of Tokyo IPO, a Web site that specializes in the public-offering market. Macquarie Research analyst David Gibson estimates the unit's total worth at around $9 billion—roughly five times operating cash flow, as of December.

Few expect Stringer to cut the financial-services business loose. It's just too profitable at a time when other divisions are struggling to get healthy. Last year, the unit's $1.5 billion in operating profit accounted for 83% of the entire group's profit, and operating margins were a lofty 25%. However, some, like Koya Tabata of Credit Suisse First Boston (CS), believe Sony would be better off cashing out entirely and using the proceeds from the sale to bolster the balance sheet.

Keep on Selling?

Sony's return on assets—a common way of measuring the profits a company's assets are generating—was an abysmal 1.2% last year and it's expected to remain there this year. Sony rivals, such as Samsung Electronics of Korea or Matsushita Electric Industrial, do far better, says Tabata.

Certainly, there is no shortage of ways to spend the $4 billion windfall Sony is expected to reap from the IPO. The company could hire more talented software engineers who can ensure that its products seamlessly link to let users share content. It could also make investors happy with a share buyback, which Macquarie's Gibson is betting on.

All good suggestions. But diverting the money from the IPO into other businesses isn't likely to please the financial unit's new shareholders. Indeed, Sony could have invested more in the business in recent years if it hadn't been so consumed with laying the groundwork for the launch of its PlayStation 3 video game console. If Stringer wants to free up more cash for the electronics division, his only choice may be to keep the asset sales going.

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