Sony Discussing Loeb Proposal as Weaker Yen Boosts Forecast

Sony Corp.’s board is “deepening” its discussions of billionaire investor Daniel Loeb’s proposal to sell part of the entertainment business, the company said after raising its full-year revenue forecast on the weaker yen.

Investors have asked for more information about the units making films, TV shows and music, and Sony is getting input from financial advisers, Chief Financial Officer Masaru Kato said at the company’s earnings press conference yesterday in Tokyo. He declined to comment on a timeframe for a decision. Loeb questioned executives publicly yesterday on a conference call.

“It is an important proposal, and the board will make a decision after having a thorough discussion,” Kato said. “The discussions are only midway, and we cannot comment further.”

Japanese monetary policy is stoking the value of exports for Sony, which gets almost 70 percent of revenue from overseas. The company raised its revenue forecast by 5.3 percent to 7.9 trillion yen ($80 billion) for the year ending March 31, even while cutting expected shipments of TVs, digital cameras and personal computers as it tries to match Samsung Electronics Co.

“Currency weakness is the main driver here,” said Hideki Yasuda, a Tokyo-based analysts at Ace Research Institute. “They’ve cut unit sales forecasts for a lot of product segments, so it’s not as though the fundamentals are really improving, but the yen is lifting earnings.”

Chief Executive Officer Kazuo Hirai has said he doesn’t plan to spin off entertainment assets as he builds services linking mobile devices and TVs with content including movies.

The company cut its target for TV sales to 15 million units from 16 million and lowered its projected digital-camera sales to 12.5 million units from 13.5 million.

Beating Estimates

The stock rose 0.9 percent to 2,123 yen at the close of trade in Tokyo. Sony shares have more than doubled this year as Japan’s benchmark Topix index added 39 percent.

Sony reported first-quarter net income of 3.48 billion yen in the three months ended June 30, compared with a loss of 24.6 billion yen a year earlier. Profit was expected to be 2.6 billion yen, according to the median estimate of five analysts surveyed by Bloomberg News.

Operating profit, or sales minus the cost of goods sold and administrative expenses, was 36.4 billion yen in the quarter.

Loeb’s Third Point LLC, with funds that control about 6.9 percent of Sony stock, said in May it wanted the Japanese company to sell as much as 20 percent of its entertainment assets in an IPO to improve the performance and raise cash to revive electronics.

Picture Profits

Sony is working with Morgan Stanley and Citigroup Inc. to study the proposal, people familiar with the matter said in May.

The company said the pictures unit posted a profit of 3.7 billion yen, compared with a loss of 4.9 billion yen a year earlier, because of the currency decline.

In U.S. dollar terms, sales for the unit fell 16 percent. After topping the U.S. box-office last year, Sony’s films have fallen to sixth in 2013 after flops “White House Down” and “After Earth,” starring Will Smith.

Sony Pictures said separately it will form a production company with Tom Rothman, the former co-chairman of Fox Filmed Entertainment. The venture, TriStar Productions, will make as many as four films a year, as well as television programming.

Loeb, speaking on a conference call with overseas investors, questioned Sony executives publicly for the first time, asking about the profitability of Sony Pictures and the outlook for the PlayStation 4 game console.

PlayStation Outlook

Without a $106 million gain from selling a music catalog to a Canadian buyer, Sony Pictures wouldn’t have been profitable, Loeb said during the question and answer session.

Demand for the PlayStation 4 looks “encouraging” and Sony is “doing our best” to gear up manufacturing, executives said in response to Loeb’s questioning. The console requires less capital investment than its predecessor because it uses PC technology, and outside manufacturers are supplying the chips.

The box-office duds prompted Loeb to devote more than half of Third Point’s quarterly investor newsletter to Sony, as he slammed the flops and “high salaries for underperforming senior executives.” He said Sony’s entertainment profit margins lag behind peers, and the unit needs closer supervision amid a lack of franchises and bloated costs.

The music unit posted a 48 percent increase in earnings to 10.8 billion yen.

Smartphone Share

A combined entertainment unit, including music and pictures, would be the second-biggest source of earnings, with operating income of 14.5 billion yen trailing only financial services. Operating income at the latter division, which sells life insurance policies, jumped 67 percent to 46 billion yen.

Operating earnings from mobile products, including Xperia smartphones, were 5.9 billion yen, compared with a loss of 28.1 billion yen a year earlier. Sales surged 36 percent on the currency and higher prices for handsets, the company said.

Smartphone shipments in the quarter rose to 9.6 million from 7.4 million a year earlier. Sony expects to sell 42 million smartphones this year, it said.

Sony’s smartphone market share in the first three months of 2013 stood at 3.8 percent, little changed from 3.6 percent a year earlier, according to data compiled by Bloomberg.

The company’s TV segment posted an operating profit of 5.2 billion yen, the first profitable quarter in three years.

Sony, which lost 762 billion yen selling televisions in the past nine years, dropped to fifth in revenue share from flat-panel TV sales during the January-March quarter as it was overtaken by China’s TCL Multimedia Technology Holdings and Sharp Corp., researcher DisplaySearch said in June.

4K Televisions

The company in April started selling a 55-inch model using a technology its dubs 4K for $5,000 after introducing an 84-inch model for $25,000 in November.

“Sony is boosting new lineups such as 4K TVs but the revival of the electronics operation is yet to be seen,” said Junya Ayada, an analyst at Daiwa Securities Co. in Tokyo.

Hirai is preparing to release the PlayStation 4 console this year to drive game earnings as consumers migrate to playing games on mobile devices from Samsung and Apple Inc. Losses at the gaming unit widened to 14.8 billion yen from 3.5 billion yen a year earlier amid falling console sales.

Loeb praised Sony’s rollout of the PS4, which is due to be released for the Christmas shopping season starting at $399.

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