Sony insurance unit seeks international IPO

Sony Financial hopes to raise $3 billion in unfavourable markets.
In a major test for the Japanese equity market, Sony Financial, the 100% owned subsidiary of electronics giant Sony Corporation, is planning to raise around $3 billion in an initial public offering next month.

The deal, which will see Sony sell up to 40% of the business, has been marketed as the parent selling a non-core insurance business to re-invest in its core activities of entertainment and electronics.

The deal is being launched against a backdrop of political turmoil and economic gloom, with the Japanese economy reported to have contracted by 1.2% in the three months to June. Previous reports had forecast a growth of 0.5%. The Nikkei 225 index fell 2.2% in sympathy on Monday, as the news emerged. The index has dropped almost 2,000 points in the last three months, from 17,760 on June 12 to 15,877 on Monday. At the beginning of the year, the index was trading at 17,353 points.

Financial stocks are also generally unpopular because of possible exposure to the US subprime debacle.

Large IPOs have been few and far between in Tokyo, and the Sony Financial deal will be amongst the largest in recent times û if it proceeds.

According to Dealogic, the biggest IPO so far this year was the $262 million deal for Universal Studios Japan (Goldman and Nomura). There have, however, been a few large secondary offerings, such as the $1.3 billion deal for Honda Motors. The last mega-IPO was completed in November 2006, when Aozora Bank raised $3.2 billion from investors.

In fact, this year has been a horrible year for equity capital markets in Japan. Last year, the markets raised $70 billion, making it the second-best performing equity market in the world. But, this year, Japan has only raised $19 billion year-to-date, compared to $46 billion at the same point in 2006. That puts Japan at number 11 on the list of best performing markets globally this year, according to Dealogic.

ôThings donÆt look ideal, thatÆs true. But this deal is so major that investors wonÆt be able to ignore it,ö says one observer.

The size of the deal in financial terms is very approximate, based on the issuance of 800,000 shares (and a 70,000 greenshoe), specialists emphasize. The Japanese prospectus, but not the international prospectus, contains the figure of Ñ415,000 per share. This translates, at an exchange rate of Ñ113.5 to the dollar, to $2.925 billion.

ôThat could be the bottom, the middle or the top of the range. ItÆs still early days,ö cautions one source. The price range for the offering is due be set on September 18 û the day the US Fed decides whether to cut rates and the day Lehman Brothers releases what are predicted to be tough earnings results - and trading will commence in October.

Most the demand is expected to come from the US, followed by Asia and Europe. Sovereign wealth funds in the Middle East will be especially targeted. Chinese institutional investors have also been considered, but the scheme for permitting qualified domestic institutional investors to invest abroad doesn't currently extend beyond Hong Kong.

Some non-syndicate bankers question the rationale behind executing a deal against such a gloomy backdrop û given that the company does not need the cash, and that the parent has ample access to capital markets funding on its own account.

The background is that back in 2001, Sony tried to find a strategic buyer for the insurance unit. At that time, current CEO and chairman Howard StringerÆs predecessor at the company, Nobuyuki Idei, was in charge.

Somewhat bizarrely, according to bankers in Japan at the time, management of the subsidiary revolted against the plan, and the deal did not go through.

The next plan, set in motion just before Stringer took over in March 2005, was to IPO the subsidiary.

ôThis deal has been gestating for ages, and commitments to the subsidiaryÆs management have been made. Apart from honouring those commitments (a big issue in Japan), I suspect itÆs also the current management under Stringer not wanting to complicate their lives by stopping a plan launched by the previous management,ö was one none-syndicate bankerÆs verdict.

From a valuation point of view, the divestment could make it easier to value Sony Corporation. On the other hand, during bad times, the financial groupÆs massive balance sheet and earnings are æuseful for propping up the share priceÆ, according to one observer.

Currently, Sony Corporation issues two sets of figures - one including the financial subsidiary, and one excluding it.

The life insurance business is valued at Ñ900.50 billion (estimate for the 2007 financial year) in terms of embedded value, according to one specialist close to the deal.

Listed rival life insurer T&D Financial Holdings has an equivalent metric, at fair value, estimated by one observer at 1.1x 2007 embedded value. In practice, T&D is trading at a 21% discount to its fair value. Shares in T&D have slumped 16% year-to-date. By embedded value, T&D is over twice as large as Sony Life.

One observer believes that Sony Life should have a higher embedded value than T&D in recognition of its higher growth rate. Indeed, the amount of new policies accounted for 6.6% of the total sum insured for the industry, but for 11.3% at Sony Life. Another impressive metric is that Sony Life's individual life sum insured grew 28% over the past five years, while the industry figure showed a decline of 18%. Sony Life reportedly has an excellent sales force compared to other life insurers.

Life insurance is by far the dominant business in the subsidiary, with Sony Assurance (mainly cars) and Sony Bank (an internet operation with low costs, high deposit rates and a wealthy client base) only valued at between Ñ77 billion and Ñ87 billion in total. Sony Assurance on its own has been valued at Ñ40-Ñ50 billion, making the bank and the non-life business roughly equal in value. The subsidiaryÆs total net income for the fiscal year ended March 31, 2007, was Ñ10.021 billion, a decrease of 13.1% compared to the previous fiscal year.

The issuance will comprise 800,000 shares of which just 75,000 shares will be new shares. That's in line with Sony Corp's plan to use the capital raised for its own purposes. Currently, opinion is split about whether the proceeds will be used for a share buyback or investments.

In total, 62.5% of the shares will be sold within Japan. Of that, 50% will go to retail accounts and 12% to institutional clients. Bankers say such a high retail element is normal for Japan, unlike the typical 90:10 ratio in favour of institutional investors commonly found in Hong Kong, for example.

37.5% of the shares will go international institutional clients. In the US, the offering will be placed under the 144a body of regulations. After sale and post greenshoe, Sony Corp will still hold 60% of its subsidiary.

JPMorgan and Nomura are acting as joint global coordinators and joint bookrunners on both the international and domestic tranches of the deal.
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