Sony Hunkers Down Before PS4 Arrives

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The struggling Japanese consumer electronic equipment manufacturer Sony (NYSE: SNE) has reportedly decided to sell one of its main buildings in Tokyo to generate $1.14 billion to pump up its falling cash reserves. Under the leadership of Kazuo Hirai, the business is shedding off its non-core assets while trying to refocus on its core consumer products such as mobile phones, tablets and gaming consoles. The news, which has not been officially confirmed by Sony, was received well by investors as its shares jumped by 2.9% in a single day on Jan. 10.

The structure of the building being sold was renovated less than two years ago and is 25 stories high with two underground levels. It houses 5,000 television and audio equipment workers. Sony will simply lease it after the sale. Nokia did something similar last quarter with its headquarters in Espoo, Norway.  The deal is also significant for Tokyo’s real estate market, which is still undergoing recovery following the property bubble of the late 80s.

Similarly, the company is also hunting for buyers of its American headquarters in New York with a value estimated to be between $700 million and $1 billion. This building used to be occupied by AT&T until Sony bought it about ten years ago, and now it is home to Sony Music, Sony Pictures and Sony/ATV. It also held negotiations with the Blackstone Group for a possible real estate transaction but the talks concluded without a deal.   Blackstone has been aggressively expanding its distressed real estate asset portfolio in recent years.  Obviously, Sony wasn’t desperate enough.

Sony has not reported a profit in its previous four fiscal years. The company’s $457 million loss for the year ending March 2010 ballooned to $5.12 billion in March 2012. Sony’s cash reserves shrank from $19.85 billion in 2010 to $13.7 billion in September 2012. During this time, its total debt increased from $13.55 billion to $14.31 billion. In other words, its cash reserves, which used to be $6.3 billion more than its debt, are now $610 million short.  While this is not a worry in the short-term, if it does not take action soon it will be in 2014.

Besides trimming down on fixed assets, Sony is also planning to sell its battery business unit. It has already disposed of its chemicals product subsidiary for $737 million and has invested $572 million in Olympus to expand into medical equipment and imaging technology. Sony is also partnering with BMG to bid for EMI labels, such as Parlophone, that are owned by Universal Music. More details of Sony’s asset shuffling are mentioned in my previous article.

Sony and its Japanese peers such as Panasonic and Sharp used to be the global leaders of television industry. But that market has been completely conquered by South Korean conglomerates Samsung and LGand it’s a market that has become so commoditized the Sony brand simply could not distinguish itself to overcome the economies of scale that Samsung, LG and up and comer Lenovo can bring to bear.  With the new strategy, Sony will heat up the competition in the phone and tablet market with Samsung and Apple (NASDAQ: AAPL) while in the gaming industry it is competing with Microsoft (NASDAQ: MSFT) and Nintendo (NASDAQOTH:NTDOY). In both of these areas, Sony is not the market leader anymore.   

The business is a late entrant to the smartphone arena, which was also recognized by its chief. Sony is counting its survival on the success of Tipo, Miro and Xperia phones. The latest Xperia Z phone was recently unveiled at the CES-2013. Armed with a 1.5Ghz quad-core Snapdragon processor, 2GB RAM and a crisp 1080p 5-inch display, Xperia Z is a good piece of hardware but what distinguishes it from its competition?  For smartphones, Sony is focusing on emerging markets as well, particularly India where it has set a target to triple its sales in the next two years to $550 million (Rs 30 billion).

Sony has not yet revealed the specific sales figures of its game consoles but it is believed that the hand-held console Vita is not doing that great. The company has revised down its combined annual sales forecast for PSP and Vita by 2 million to 10 million units. According to latest available data for annual console sales, Xbox 360 sold 14.9 million units in 2011 while Sony’s PS3 and Nintendo’s Wii were able to sell 14.1 million and 10.33 million units respectively. 2012 is not going to be any different. The NPD Group has released the list of top ten selling best games in the US for 2012. Among them, the third biggest selling game, Halo 4 is exclusive to Xbox 360 while no PS3 exclusive title has made it to the list.      

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p>Sony</p> </td> <td> <p>Microsoft</p> </td> <td> <p>Apple</p> </td> </tr> <tr> <td> <p>Stock 6m</p> </td> <td> <p>-13.83%</p> </td> <td> <p>-8.42%</p> </td> <td> <p>-13.92%</p> </td> </tr> <tr> <td> <p>P/E</p> </td> <td> <p>N/A</p> </td> <td> <p>14.5</p> </td> <td> <p>11.78</p> </td> </tr> <tr> <td> <p>EPS</p> </td> <td> <p>-5.75</p> </td> <td> <p>1.85</p> </td> <td> <p>44.15</p> </td> </tr> <tr> <td> <p>Yield</p> </td> <td> <p>2.80%</p> </td> <td> <p>3.50%</p> </td> <td> <p>2.00%</p> </td> </tr> <tr> <td> <p>ROA</p> </td> <td> <p>0.01%</p> </td> <td> <p>14.21%</p> </td> <td> <p>23.61%</p> </td> </tr> <tr> <td> <p>ROE</p> </td> <td> <p>-15.16%</p> </td> <td> <p>24.50%</p> </td> <td> <p>42.84%</p> </td> </tr> </tbody> </table>

Where Sony will have to move is, like everyone else, towards an integrated content delivery system that has some form of comparative advantage over the competition to draw in consumers and keep them there.  Even Microsoft, as late as they are to the party, is farther along than Sony.  Sony will have to use its music and film content to drive this and tie it all back into the Playstation 4, which literally has to be superior in every way to the next Xbox in terms of content available, technology and the ever elusive, fun factor.  It’s a tall order.

All of these cost-savings measures are designed to get the company to that point. If you’re a buyer of Sony at this point it will have to be on the future of its gaming and entertainment plans. 

 


PeterPham8 has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. The Motley Fool is short Sony (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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