Lack's Arrival Stirs Sony Speculation

Music industry newcomer Andrew Lack brings a fresh set of ears to the troubles at Sony Music, but it's his corporate experience at General Electric Co.'s NBC that has Wall Street wondering what Sony is up to.

On the face of it, the Tokyo-based conglomerate needs to revive its music division, and as chairman and chief executive of Sony Music, Lack will have to contend with the same economic and piracy issues facing all the majors. At the same time, Sony has considered spinning off its entertainment assets in an initial public offering that would separate them from its vast electronics business, financial services and video game ventures.

Some steps have been taken in that direction, like creating Sony Broadband Entertainment as the U.S. holding company for Sony's music, motion picture, television and other entertainment assets.

While observers and analysts say an IPO does not appear to be imminent, it is considered far more likely than Sony selling part of all of those assets because chief executive Nobuyuki Idei has emphatically declared his desire to stay in entertainment despite persistent investor doubt about that commitment (HR 5/10).

"Sony has been a vortex of continual rumors over the last decade of selling, spinning off, repackaging, repurposing (or) joint venturing many of their media businesses," Gerard Klauer Mattison & Co. analyst Jeffrey Logsdon said. "By changing to someone (Lack) whose experience really is in media management as opposed to talent development, you're commandeering a whole new set of business skills."

Undoubtedly, the music industry needs to find a new business model, Logsdon said. North American CD sales fell 9% last year (HR 1/7).

Sony's music operations, where Thomas Mottola resigned Thursday as chairman and CEO, ended the fiscal second quarter in September with a $46 million loss and a 7% decline in revenue.

Because of the weak economy, Sony's dominant division, electronics, continues to be a drag on earnings, though the related gaming business is among its strongest divisions.

While asset sales are doubtful, an IPO remains a possibility, Morningstar analyst David Kathman said.

"The electronics business is very cyclical — it's very dependent on the broad economy," Kathman said. "Entertainment businesses are not so much cyclical like that as they are volatile because you can have a big hit movie like 'Spider-Man' and a record boxoffice year, but the next year you might fall off a cliff."

In fact, Sony's studio was the top earner last year with a record-setting $1.57 billion in North American grosses.

If Sony were to spin off any assets, Pittsburg Research analyst Jeffrey Pittsburg believes it would be its entire U.S. operations — Sony Corporation of America — so the combined electronics/ entertainment outfit could pursue acquisitions. SCA is already traded separately in the United States.

Sony officials denied Friday that there are plans for an IPO.

In the near term, Sony will slowly work to rebuild the music division as it did with the studio a few years ago, Pittsburg said.

"They brought in guys who were savvy on the financial side and who could focus on the mundane things to make it profitable aside from the big boomers they get once in a while," Pittsburg said. "My bet is they're going to do the same thing here."

While other conglomerates, like Vivendi Universal, are mulling the spinoff of some assets, the media has not played a big role in the IPO market in recent years, and investor interest is questionable, said David Menlow, president of research firm IPO Financial Network.

The end of the Internet bubble and the resulting decline in the number of IPOs have investors demanding more of companies that go public, especially an ability to grow profitably and hold debt levels in check, Menlow said.

"Spinoffs used to be seen as a safe haven for investors when the IPO market started its downturn," Menlow said. "But now they tend to prefer stand-alone companies" because spinoffs tend to keep the assets under the control of the parent company.

These deals are often used to help the parent company offload debt and generate currency for acquisitions, though the new companies tend to struggle, he said.

Georg Szalai in New York contributed to this report.