Can Texas Pacific Rewire JVC?

Matsushita looks set to unload the brand to the U.S. private equity fund, but a turnaround won't be a simple plug-and-play

Will Victor of Japan (VJAPY), known for its JVC electronics brand, be better off under the wing of a U.S. private equity fund? JVC parent Matsushita Electric Industrial (MC) certainly seems to thinks so.

On Mar. 16, Matsushita was considering a deal with Texas Pacific Group that would transfer the tech giant's 52.4% stake in JVC to the Fort Worth fund, according to Japanese financial daily Nikkei. Although Matsushita spokeswoman Mio Yamanaka said nothing had been decided, Nikkei said Matsushita planned to pick TPG over U.S. fund Cerberus Partners this week. TPG declined to comment. A formal deal could be signed later this month.

That should be a relief for Matsushita's chief executive, Fumio Ohtsubo, who has been dogged by questions about the company's worst-performing division since he took the helm last year. It could also prove a boon for investors.

Based on JVC's current market price, the sale should bring in more than $680 million for Matsushita. The company could use the windfall for raising dividends and carrying out a planned $1.2 billion share buyback program this year.

Not Moving Much

Ohtsubo's biggest motivation for unloading JVC is to fatten profit margins to 8% to 10% over the next three years, from around 5% now. Holding onto unprofitable JVC would make that difficult, if not impossible. He's also making a smart decision to focus on one mainstream electronics brand, Panasonic, rather than owning two that overlap on everything from DVD recorders to car navigation systems. Since Matsushita put JVC on the block in early February, its stock has hardly budged, while JVC's has lost 5%.

The attention now shifts to TPG, which is taking on one of the toughest jobs in the electronics industry. A pioneer in TVs in the 1930s and video cassette recorders in the '70s, JVC has fallen behind bigger rivals such as Samsung Electronics and even parent Matsushita in making the shift to new digital gizmos.

The one thing going for JVC is its brand. Overseas, where the company is widely viewed as a strong niche player, its products are popular with consumers. That's a plus for TPG, which will be looking to sell a resuscitated JVC to a tech company, perhaps in Asia.

Drag on Earnings

But fixing JVC will likely take TPG several years. Nikkei reported that the fund plans to get rid of JVC's money-losing businesses and delist the stock. The first priority for TPG, which controls $30 billion in investments worldwide, will be to turn JVC's electronics business around.

Last fiscal year that unit accounted for nearly three-fourths of total revenues but was JVC's least profitable. (Its other units, which make video cameras for broadcasters, key components for computers, other electronics, and software and music content, all made money last fiscal year through March, 2006.) This fiscal year the company is expected to report a second straight year of operating losses after revising earnings downward in February.

One of JVC's main problems has been making the transition from older technologies such as picture-tube TVs and rear-projection TVs to flat-panel sets using plasma and liquid-crystal displays, analysts say. That has made it hard to cut costs fast enough to stay ahead of a 20% to 30% annual fall in TV prices.

And as consumers swap their bulky sets for flat screens, JVC has fallen further behind rivals. That's one reason investors have been dumping JVC shares, pushing down its value by more than 50% in less than three years.

Looking Ahead

The risk for TPG is that it gets stuck with a company that has too few innovative products to compete against the industry's giants, or that its plan incites a backlash from JVC's rank and file. The fund will want to avoid the quagmire Goldman Sachs appears to have gotten itself into after investing more than $1 billion last year to help revive Sanyo Electric.

TPG might be getting in at the right time. Nomura Securities analyst Eiichi Katayama predicts that JVC's consumer electronics unit will eke out an operating profit of $3.4 million on sales this fiscal year through March.

Although it won't be enough to offset losses in other divisions this year, the electronics rebound should help the company turn a profit for the next two years. Katayama figures that JVC could swing from a $34 million operating loss this year to a $17 million profit next year and then to $51 million the following year. The challenge for TPG will be to make enough of its own changes to galvanize JVC without compromising the brand.

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