Should Sony Listen to Calls to Split the Company This Time?
As the activist investor Daniel Loeb changes his tune on film and TV studios, he urges the Japanese conglomerate to spin off assets and focus on building a "New Sony" with its "undervalued" content business at the center.
For the second time in six years, Dan Loeb and his activist hedge fund, Third Point, are calling on Sony Corp. to spin off assets in an effort to boost rewards for investors saddled with shares of a complicated media giant that is underappreciated on Wall Street.
It's not entirely deja vu, though. Last time, Third Point encouraged the Japanese conglomerate to jettison its "bloated" entertainment assets, but now it is bullish on that business and wants it to be the focus of a "New Sony."
Sony "is one of the most undervalued large cap businesses in the world today," trading at about eight times earnings while competitors are north of 12, Third Point argues in an open letter dated June 13. Third Point previously invested in Sony in 2013, and Loeb's activism back then drew the ire of George Clooney, who accused of him of being a "carpetbagger" who was trying to manipulate the stock.
Third Point sold its position within two years (presumably for a small profit) but has amassed $1.5 billion in shares since then, about 10 percent of Third Point's roughly $15 billion portfolio.
In Third Point's public presentation, Loeb praises Sony CEO Kenichiro Yoshida for a "dramatic transformation" at the company he has led since April 2018, then advises him to spin off Sony's strong semiconductor business and list it in Japan where it could be worth $35 billion in five years, while Sony's entire market cap on the New York Stock Exchange is at $63 billion.
Sony should also sell stakes in health care, insurance, Spotify and other assets, slim down its electronics business and allocate the "majority of capital investment and management focus" toward gaming, music and movies, in order to create "a leading creative entertainment company." Loeb and company have their supporters, especially since the stock jumped 6 percent in the first three trading days after June 13.
"Loeb believes that Sony's entertainment assets are structurally high-multiple businesses with layers of strategic optionality," says Ben Weiss of 8th & Jackson Capital Management. "Separating the entertainment assets from the semiconductor business will highlight the value of Sony's unique intellectual property, without any disadvantage to the overall business."
Still, some may argue that Loeb might have been better off simply staying put with the Sony stock he purchased for about $20 a share in August 2013; its value would have risen 160 percent. Nevertheless, Third Point argues that Sony remains "one of the cheapest large cap stocks globally."
The complex nature of Sony's portfolio isn't a new complaint, as a Goldman Sachs report argued in 2018 that Sony's mix of life insurance and semiconductors, coupled with video games, recording artists like Beyoncé and Justin Timberlake and the Spider-Man franchise, "appears to have discouraged entry by a broad range of investors."
Loeb argues that Sony Pictures alone is worth some $15 billion as a top-five film and TV studio, especially as Netflix, Amazon, Hulu and other streamers bid for more and more content. Plus, Sony is already No. 1 in both games and music publishing, and electronics is no longer a drag on financials. If this "New Sony" had existed from 2013 to 2018, it would have boasted 39 percent annual earnings growth and, if created today, it would sport a $36 billion value on Wall Street with $4.2 billion in EBITDA.
Third Point says that Sony as it exists now garners 43 percent of its profit from gaming courtesy of PlayStation, the world's largest video game platform. Music accounts for 16 percent, the studio 8 percent and the semiconductor business that should be spun off is good for 20 percent. "I believe Sony is willing to listen," says Steven Birenberg, founder of Northlake Capital Management, of the Third Point plan. "The company has done a good job already improving operations, and via share buybacks has shown a willingness to be more directly shareholder-oriented."
This story first appeared in the June 19 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.