Sony to pump $2 b for next-gen chips

TOKYO - Electronics and entertainment conglomerate Sony Corp issued a 220 billion yen ($2.0 billion) in euroyen convertible bonds on Monday to raise cash to invest in next-generation microchips and devices.

The bond issue will be Sony's largest since a 300 billion yen domestic convertible bond in 1996 and the biggest by a Japanese company since Fujitsu Ltd, Japan's largest computer maker, unveiled a 250 billion yen issue in May of last year.

In October, Sony unveiled a restructuring plan that will reduce its workforce by 13 percent, or 20,000 jobs, over the next three years and focus on cutting-edge semiconductors as it overhauls its struggling electronics business.

Sony plans to invest 500 billion yen over the next three years in semiconductors, including research and development for a high-powered microprocessor codenamed "cell" that it is developing with Toshiba Corp and IBM.

Analysts expect the chip to power Sony's next-generation game console, but the company aims to make "cell" the global standard for consumer electronics in the high-speed Internet era.

"Looking at our strategy and our cash flow, we feel that this capital procurement amount is appropriate for our growth," Chief Financial Officer Takao Yuhara told reporters, adding that Sony could cover its restructuring costs and remaining investments from its cash flow.

The five-year convertible bond does not carry a coupon and matures on December 18, 2008. It will be priced 2.5 percent above par. The offering is for 220 billion yen with a greenshoe option for an additional 30 billion yen.

Sony has set a conversion premium -- the percentage by which the conversion price exceeds the current share price -- at 47.5 percent above Monday's market close of 3,800 yen. That puts the conversion price at 5,605 yen.

DILUTION FEARS

Investors will not be allowed to convert the bonds into shares unless the share price reaches 110 percent of the conversion price for a certain period of time.

Under U.S. accounting rules, dilution of shares is not recognized until the conversion takes place.

In London, Sony's shares fell to 3,685 yen, as of 1600 GMT, down 3.0 percent from the Tokyo close.

If the entire 250 billion yen in bonds were converted into equity, the new shares issued would come to less than five percent of Sony's total shares outstanding. Initially, the bond will inflate Sony's net debt of about 770 billion yen.

Convertible issues are often seen as negative for a company's shares as they dilute per-share values if investors take up the conversion option.

Sony officials said the high premium allowed the company to procure capital at low cost without much worry about dilution, due to the difficult conversion conditions. Investors, on the other hand, were not so sure it was a win-win proposition.

"I don't know why Sony would issue such an unattractive CB. The amount is huge. It will not be good for the CB market," said Kazunori Ohtomo, senior fund manager at STB Asset Management.

For the three years to March 2006, Sony has earmarked restructuring charges of 335 billion yen for its electronics division, which accounts for 65 percent of consolidated revenue.

One of the pillars of Sony's restructuring plan is the convergence of its core business areas -- creating links between its consumer electronics products and its music, movies and games -- with network-enabled chips connecting hardware and software.

The issue is the latest funding move by Japanese electronics makers after NEC Corp said last month it planned to raise nearly $2 billion to repair its balance sheet and for capital spending.

Investment banks Merrill Lynch & Co Inc and Goldman Sachs are joint lead managers for the bond issue.

(Additional reporting by Alistair MacDonald in London)