When Faultline ran a series of article on the valuation of Sony back in 2004, we valued its financial services arm at around $3 billion, given the slow growth and low multiples that tend to be attached to banking and insurance companies.
News this week that Sony is expecting a valuation of almost $8 billion for Sony Financial Holdings when it takes it public some times during October means that Sony will be able to put something like $2.4 billion in its treasure chest and still hold onto over 60% control of the company. The key importance for Sony is that the balance sheet of its financials group so often drags down its own balance sheet. The finance company has future outgoings associated with pension funds and policies that mature in the future and this is expressed as debt on its books and it makes it look like the finance side is a dead weight, when actually it is a profitable and positive business.
In total Sony will sell around $2.7 billion in shares with some of them new shares and that money going into the group, and the rest belonging to Sony. It will issue 75,000 new shares, sell 725,000 out of 2.17 million shares, and allow up to 70,000 extra for over allocations. It plans to offer each share for 415,000 yen, around $3,600 each.
The Financial Services segment includes Sony Life, which underwrites insurance policies, primarily for individual life insurance products in Japan, and sells non-life insurance products provided by Sony Assurance.
Sony Assurance offers car and medical insurance in Japan only.
Sony also has Sony Bank, an Internet-based banking business, which includes personal loans, mortgage loans, investment trusts, and deposits, for individual customers in Japan; and Sony Finance, which conducts a leasing and credit financing business in Japan, with a credit card business for Internet shopping. The credit card business uses non-contact IC card technology developed by Sony Electronics, but that’s the only link.
Sony had promised to move this out of the group, or at least look hard at the idea, back in 2004, but it has taken this long for the Japanese financial markets to be in good enough condition for Sony to get the right price. Deals with underwriting agencies and institutionalized investors will already be in place, so this deal should now proceed according to plan despite the turmoil in US markets for housing debt and the sub-prime market, which should not affect it.
The natural improvement this gives to the Sony balance sheet (it will have almost $5 billion of shares on its books plus $2.4 billion in new cash, instead of debt) should have the effect of making the company look a better bet for investors and we would not be surprised to see this lift the Sony market capitalization despite the fact that the finance group made the bulk of Sony’s profit on its last set of figures.
The move should not be under-estimated and it will allow Sony management to focus entirely on its core businesses.