Billionaire hedge fund manager Dan Loeb’s call to spin off Sony Corporation (NYSE:SNE) (TYO:6758)’s entertainment business hasn’t gone down well with the electronics giant, Wall Street and economists. Sony has already rejected Dan Loeb’s proposal, and Goldman Sachs Group, Inc. (NYSE:GS) favors the Japanese company’s decision against the hedge fund manager’s proposal.
In the latest development, credit rating agency Fitch Ratings said today that spinning off the entertainment business is unlikely to solve Sony Corporation (NYSE:SNE) (TYO:6758)’s credit weaknesses, reports Reuters. Sony has a ‘BB-‘ rating, and the company needs to focus heavily on improving its core electronics business. Monetizing a small part of the entertainment division can neither boost the company’s strategic focus nor catalyze the company to transform its electronics business.
Fitch acknowledges that Wall Street undervalues Sony Corporation (NYSE:SNE) (TYO:6758)’s entertainment business, but it generates stable cash flows that credit investors have enjoyed. Spinning off 15-20 percent of the entertainment business, as Loeb proposed, would generate cash to invest in new products or pay off some debts, but some dividends will disappear from the company’s future cash flows. The entertainment division has been the main cash-generating operation of Sony. For the year ending March, 2013, it posted a profit of 85 billion yen, in contrast with the loss of 134 billion yen for its electronics division.
Sony’s Restructuring Attempts
Sony Corporation (NYSE:SNE) (TYO:6758)’s restructuring attempts have helped the company stabilize its credit profile. But the PlayStation maker can’t return to investment grade until it launches some blockbuster electronics products again. Sony Corp. has failed miserably at launching a market leading product for years, and the company management has reduced its portfolio to only profitable products. The company expects its TV business to swing to profitability this year. It has been consistently losing money for the last nine years.
What Dan Loeb Should Do
Fitch says if Dan Loeb really wants to revive Sony Corporation (NYSE:SNE) (TYO:6758)’s electronics business, he should propose to sell 100 percent of the entertainment division and other operations that don’t have a synergy with the company’s core electronics business, like its 60 percent stake in Sony Financial Holdings. Then the company will have no other option but to focus on the problems with its core electronics business. But it will prompt credit investors to demand to be repaid because then Sony’s cash flows will depend entirely on the turnaround of its electronics business, which is entirely uncertain.
American shares of Sony Corporation (NYSE:SNE) (TYO:6758) were down 1.03 percent to $20.24 at 10:12 AM EDT.