TOKYO Shares of Sony Corp (6758.T) tumbled over 10 percent on Thursday, a day after the consumer electronics maker said it will raise 150 billion yen ($1.9 billion) through a sale of convertible bonds to help finance a series of investments.
Sony, beset with falling demand in its core TV business and the growth of rivals like Apple Inc (AAPL.O) and Samsung Electronics Co (005930.KS), has invested in an assortment of businesses from medical equipment to cloud gaming after CEO Kazuo Hirai took the helm in April.
On Wednesday, the maker of Vaio laptops and PlayStation game consoles said it will issue the five-year bonds convertible into shares to finance an investment in Olympus Corp (7733.T), the acquisition of U.S. firm Gaikai Inc, ramping up in CMOS image sensors used in devices like digital cameras and to repay debt.
Sony shares plunged 10.7 percent to 777 yen. If the stock price were to finish the day with such losses, the shares would hit their lowest close since 1980, according to Thomson Reuters Datastream.
"Worries of dilution are pushing shares down today," said Katsuhide Takahashi, a credit sector specialist at Citigroup in Tokyo.
If all the convertible bonds were exchanged for Sony shares, it would lead to a dilution of existing share holdings by as much as 15.6 percent.
"In a way, the fact that Sony can issue corporate bonds and access the market is positive, in comparison to its peers that can't even do that like Sharp. From an equity perspective, there are worries of dilution but on a credit front this is positive," Takahashi said.
Rival Sharp Corp (6753.T), has effectively been shunned by the debt capital markets because of its massive losses and falling market share, forcing it to turn to its banks for a bailout in September and consider capital tie-ups.
A Hong Kong-based credit analyst said some investors were likely selling Sony shares in favor of the convertible bonds, which protect their investment if the share prices falls but still offer upside in the event a rally.
Despite a zero coupon, which reflects Japan's near-zero rate environment, the bonds would be attractive given a low conversion premium, set at 10 percent above Wednesday's close at 870 yen.
"It would be a safer bet for stockholders to buy the convertible bond as its downside is better protected relative to the equity," he said.
Convertible bond arbitrage traders and hedge funds could also use the bonds to hedge short selling Sony shares.
"The cost of shorting Sony stock would be low and it will be easy to short, so this trade will be attractive," he said.
Hirai has pledged to revive the once-stellar brand by bolstering gaming, digital imaging and mobile devices, and nurturing new business such as medical devices. He has promised to reduce its workforce by about 6 percent and make big cost cuts in its TV unit, which has lost close to $9 billion over the past 8 years.
After four straight years of net losses, Sony is also hampered by weakened finances. Its shareholder equity ratio - a measure of the company's ability to meet its debt obligations and other expenses - stands at 14.1 percent. A rate of 20 percent is generally considered a healthy minimum.
Last week, Sony's long-term debt rating was lowered one notch by Moody's Investor Service to the lowest investment grade level because of shrinking demand for its consumer electronics.
The downgrade means that some of Sony's commercial clients would be able to demand immediate reimbursement on advances paid, but the Japanese firm said it would be able to pay any claims with cash on hand and short-term loans.
The benchmark Nikkei .N225 rose 0.9 percent.
($1 = 80.2200 Japanese yen)