Financial Activist investor Dan Loeb has called for a splitting up of Sony claiming that the Japanese Companies semiconductor business should be in a separate operation away from the struggling consumer electronics business.
Loeb who runs Third Point Investments, has raised this issue before has a $1.5 billion stake in Sony and is now pushing hard for dramatic changes to the Sony operation who in Australia has streamlined their business, cutting costs and expanding categories such as audio and cameras.
Shortly after Loeb revealed the 102-page letter he had sent to Sony management Sony shares rose 3.1% in Tokyo. He has also stablished a website calling for the breakup (See here).He claims that the new independent entity could be worth $35 billion within five years.
“We rarely find companies like Sony that have a depressed valuation, high-quality underlying businesses, numerous options for portfolio optimization, and a capable management team,” Third Point said on a website entitled “A Stronger Sony.” “We believe a spin‐off of Sony Technologies brings inherent advantages that will unlock long‐term value.”
Sony spokesman Takashi Iida declined to comment on Loeb, but said management takes constructive proposals “seriously.”
Sony’s processor business generated ($1.3 billion) in operating profit on 879 billion yen of revenue in the latest fiscal year.
That’s similar in size to Analog Devices and Advanced Micro Devices (AMD) two companies with market values of more than $30 billion.
Bloomberg claims that Sony Chief Executive Officer Kenichiro Yoshida hasn’t shown interest in parting with the chips business. He underscored his commitment last month by increasing investment in image sensors to about 700 billion yen in the three years ending March 2021 and unveiled plans for new chip designs outfitted with artificial intelligence.
“By leveraging the superior technology, we have developed in this business, we expect to maintain our industry leading position going forward,” he told investors last month. “We expect this business to generate high return on investment in the long term.”
Third Point also wants sales of its stakes in Sony Financial, M3, and Olympus. and Spotify, which it estimates currently account for about 20% of Sony’s market capitalization.
Doing so would give the company cash to invest in its main entertainment business: gaming, music and movies, it said.
Loeb was less concerned with Sony’s legacy electronics businesses, which make TVs, cameras and mobile phones. These assets are smaller than the entertainment operations and they’re “no longer the drag on profitability that they were six years ago,” Third Point said. Cash flow from electronics can be reinvested into entertainment, it added.
Now that Sony is on a better path operationally, Yoshida can tackle this “by shifting his focus to unlocking the value of the company’s tremendous portfolio of assets,” Third Point said. “Today, Sony trades at roughly half our estimate of intrinsic value, with additional upside from optimizing capital allocation.”
Although Loeb’s prior attempt with Sony was unsuccessful, it did result in changes including the replacement of executives at its film division. Yoshida was Sony’s chief financial officer at the time of the last campaign, and recently said he looked back fondly on his interaction with the activist investor.
“I thought it was a good thing that we negotiated with Third Point at the time,” Yoshida said in a group interview last month. “It’s important to talk to investors. Whether you can convince them is part of running a business.”
