HELSINKI/TOKYO Sony Corp (6758.T) is in talks to buy out Ericsson (ERICb.ST) from their mobile phone joint venture in a bid to catch up with rivals, a source with direct knowledge of the matter told Reuters.
The move could help Sony recoup ground in the battle against Apple Inc (AAPL.O) and Samsung Electronics (005930.KS), where it has been hampered by a disjointed strategy regarding mobile gadgets and online content.
Tablets, games devices and other consumer electronics are offered by Sony, while smartphones come from Sony Ericsson.
Sony and Sweden's Telefon AB LM Ericsson have been talking for weeks about the future of the 50:50 joint venture because the companies must decide this month whether to renew their 10-year-old pact, two industry sources told Reuters.
A source with direct knowledge of the matter told Reuters on Friday Sony was discussing a buyout. The source did not want to identified because the talks were not public.
Yoshiharu Izumi, an analyst at J.P. Morgan in Tokyo, said the deal could be worth upwards of $1.3 billion (837.6 million pounds), depending on what agreement the two reach about the continuing use of Ericsson's telecoms patents.
"Up to now Sony's products and network services have all been separate. Unifying them would be positive," Izumi said.
"If they can leverage their games and other network services I think they can lift their share," he added.
Should any buyout go ahead, Sony will need to take steps to protect itself from legal challenges to its patents. Thus far the joint venture has been protected from the kind of court room challenges seen by rivals because Ericsson, the world's largest mobile telecom gear maker, holds one of the largest patent portfolios in the industry.
"Sony will definitely want to bolster its portfolio in such a deal so it can defend itself in the most litigious segment of the technology industry," said intellectual property expert Florian Mueller.
The Wall Street Journal said in a report on Thursday the talks between the two companies were ongoing and could break up at any time, citing people familiar with the matter.
Ericsson and Sony declined to comment on the talks. "We have a long-term commitment to our joint ventures," said an Ericsson spokesman.
"The talks are not something that have been announced by Sony. We are declining to comment," said Mami Imada, a Sony spokeswoman in Tokyo.
Last month at the IFA trade fair in Berlin, Sony Ericsson's phones were presented inside the Sony hall, mixed with Sony's TV sets and new tablets.
Sony's shareholders, however, appeared wary of any deal that would burden the company's finances. Its stock fell 3.7 percent to 1,415 yen on Friday, compared with a 1 percent gain in the benchmark Nikkei 225 index .N225.
The deal might come at a bad time for Sony, which is also taking part in an auction for British music company EMI in which the owner is seeking to fetch $3 billion or more.
"It's not necessarily bad news, but the share is falling, so investors apparently see some minuses, such as concerns about how Sony would finance the purchase, as well as the difficulty of valuing Ericsson's patents," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments, which owns Sony shares.
The smartphone venture, formed in 2001, thrived after breakthroughs with Walkman music phones and Cybershot cameraphones, both of which leveraged Sony's brands.
But it lost out to bigger rivals Nokia NOK1V.HE and Samsung at the cheaper end of the market, and was late to react to Apple's entry into the high-end of the market.
It has refocused its business to make smartphones using Google's (GOOG.O) Android platform, but has dropped to No. 9 in global cellphone rankings from No. 4 just a few years ago.
The joint venture is making some progress and turned in a net profit of 90 million euros last year after booking a loss of 836 million euros in 2009. But it reported another loss for the April-June quarter.
The venture is due to report its September quarter results on Oct 14.
Shares in Ericsson jumped late on Thursday following the Wall Street Journal report on hopes it can exit the venture which has been burning cash and faces increasingly tough competition in the smartphone race.
Sony Ericsson's cash flow from operating activities was 577 million euros negative in the first half of 2011.
"A buyout would make a lot of sense for Ericsson as I believe their share in the joint venture is worth to them between zero and minus 1 billion euros," said Sanford Bernstein analyst Pierre Ferragu.
Inge Heydorn, fund manager at Sentat Asset Management, also said the value of the stake for Ericsson was likely negative.
"For Ericsson I think it would be good to get rid of it. I think it will never become good. I think every crown they would get is a positive," he said.
Shares in Ericsson were up 0.3 percent at 69.40 crowns by 0808 GMT.
(Additional reporting by Yinka Adegoke, Liana Balinsky-Baker, Simon Johnson, Tim Kelly, Sven Nordenstam, Anna Ringstrom, Olof Swahnberg, Lisa Twaronite; Writing by Isabel Reynolds; Editing by Sophie Walker, Erica Billingham, Joseph Radford and Muralikumar Anantharaman)