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Sony Buys EMI for Around $2 Billion

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Sony Corp (SNE - Free Report) , which already controlled a 30% stake in music publishing company EMI, is now forking out another $2 billion to acquire another 60%, currently held by Abu Dhabi-based investment firm Mubadala. The remaining 10% is still owned by the Jackson estate.

The acquisition wasn’t unexpected, because Sony has been managing EMI’s accounts since it acquired the 30% stake back in 2011.

The past six years have seen a large scale restructuring of the business under former chief executive Kazuo Hirai and current CEO Kenichiro Yoshida under which many employees were let go and the company also disposed of its Vaio PC business. They also launched the very successful PS4. The cell phone business continues to struggle, but management is optimistic about its future.

Yoshida said that the acquisition was intended to stabilize the company’s revenue streams, which makes sense because it adds 2.1 million songs to Sony’s already long list of 2.3 million songs making it the leading publisher. Moreover, EMI’s catalog includes both new and old songs, helping it cater to a really wide audience.

Also, the publishing business has grown particularly attractive since the introduction of fixed-price streaming services from companies like Apple (AAPL - Free Report) , Alphabet’s (GOOGL - Free Report) YouTube and Google Play, Spotify (SPOT - Free Report) ) and others. That’s because every time someone plays a song, publishers make money by collecting royalties on behalf of song writers. Companies like Sony, Universal and Warner that operate as record labels, also collect revenue for the songs they record.

So growing this business is a solid strategy, especially since hardware sales from things like game consoles are seasonal and therefore relatively volatile.

Management is optimistic that a greater focus on consumer services and content, entertainment, electronics (game consoles, cameras, chips, phones) and financial services will enable the company to generate  2 trillion yen ($18 billion) or more in cash flow over the next three years, a nearly 30% improvement over the prior three years.

Operating profit in the semiconductor business, which includes image sensors (for self-driving cars and artificial intelligence among other things), is expected to grow from an estimated 100 billion yen this year to 160-200 billion yen in fiscal year 2021 ending March. The growth in image sensors is expected to come from a 1 trillion yen ($9 billion) investment over the next three years.

Summing Up

Sony is consolidating its entertainment and image sensor businesses and this acquisition (like its recent acquisition of Peanuts Holdings for $185 million) is expected to help on the entertainment side.

Including EMI, Sony is the leading music publisher in the world with a 27.3% share of the market in 2017, according to Music & Copyright’s annual survey of the recorded-music and music publishing sectors. Universal follows with a 19.5% share, Warner with 12.0% and the Independents the remaining 41.2%. The music industry, which has been in the doldrums between 1999 and 2014, is finally out of the woods.

This is a very good time to be in the music publishing business because of the rising demand for song writers. The need to produce hits quickly is also giving rise to song writing teams. The publisher, which manages the song writers’ accounts therefore stands to make more money. Of course, while this will definitely bring stability to its revenue stream, the growing demand and easier distribution is driving up demand for song writers that will have an impact on cost.  

 

Recommendation

Sony has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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