Sony (SNE) Will Have To Sell Its Studio Business, Could Get $6 Billion

Sony (SNE) is in trouble, and it is very deep trouble. For the fiscal year ending March 31, the conglomerate lost more than $1 billion on $79 billion in revenue. Sales were down by over 12%

Nearly every segment of Sony’s business did poorly. Revenue in its huge electronics division dropped 17%. The LCD TVs, PCs, and video cameras that it manufactures and markets have come under intense price pressure. TVs are close to being a commodity and almost every large consumer electronics firm is in the flat panel screen business.

Sony’s video game division had an 18% drop in revenue to $10.7 billion. The business lost almost $600 million as sales of the aging PS2 dropped and the newer PS3 did not pick up that slack. The PS3 is never going to be the smashing success that Sony hoped it would be. It has fallen too far behind the extremely profitable Nintento Wii and the Microsoft (MSFT) Xbox 360. Sony will have to drop the price of its PS3 machine eventually if it wants to have any chance to gain market share.

Sony’s piece of the Sony Ericsson handset joint venture will not contribute to  better earnings for some time. The competitive pressures from Apple (AAPL), Samsung, RIM (RIMM), and Nokia (NOK) are simply too great. Handset unit sales at Sony Ericsson have been dropping.

The one large business that Sony owns that bears no relationship to its core consumer electronics operations is it movie studio. In the last fiscal year, the business earned $305 million, down 49%, on revenue of $7.3 billion, down 16%. The studio operating financial results are highly cyclical based on both the economy and the box office results of its films and sales of its DVDs.

The concern about the premium content assets of any large company is that they will slowly lose their value over time as the Internet gives consumers access to movies and television for free, or at much lower prices than the current  income from theaters and DVDs. If this is true, the value of a studio will fall further and further over time. On the other hand, if two of the largest feature film businesses were put together, the cost savings would be considerable and the marketing clout of the new entity would probably improve.

Sony’s studio may be a bright spot in its earnings now, but there is very little chance that profits from the division will go up sharply and stay up. The turnaround of Sony does not depend on the studio. The turnaround of Sony depends almost completely on its electronics and game operations which make up the great majority of its sales.

Sony has a chance to sell its studio business while it can still fetch a high price. Several media conglomerates that already have film divisions would be bidders. The list would include Time Warner (TWX), Viacom (VIA), Disney (DIS), and News Corp (NWS). Time Warner and Disney have the strongest balance sheets. Time Warner recently got $9.25 billion as a special dividend which was a result of a spin-off of its Time Warner (TWC) cable operations. The firm intends to spin-off AOL before the end of the year. There are also rumors that the Time Inc. publishing division, which has very low margins, will be sold.

Time Warner could end up with film and TV content businesses and its cable networks after a restructuring. Buying another studio to build on those core operations would make sense.

What is Sony’s studio business worth? A review of the market capitalizations, balance sheets, and film division earnings of Viacom, Disney, Time Warner, News Corp, and Sony would indicate that Sony could get 80% of annual revenue or 16 times last year’s operating income. Operating income was unusually low in Sony’s last fiscal, so on an historical basis, the multiple of operating income would be closer to nine times. Sony could get nearly $6 billion based on those assumptions.

Sony could do several things with the cash. It might give shareholders who are tired of the company’s constant struggles a larger dividend or share buyback. Sony’s market cap is only $28 billion, so it could purchase a significant portion of its shares. Sony could also use the money for its capital expenditures or to reduce its modest debt. The cash could certainly be used for strategic acquisitions to buttress its flagging electronics and game divisions.

A large content company would realize savings in putting together two studios. Sony’s film library contributes an on-going stream of revenue from DVD sales. A new, very large studio created by the combination would have improved leverage with content channels including new online distribution networks.

Sony CEO Sir Howard Stringer needs to buy his turnaround some time. Selling the film division does that for him.

Douglas A. McIntrye