Sony's Management Should Pay Attention to Dan Loeb
A Value-Enhancing Proposal
Daniel Loeb, who owns about 7% of Sony's shares, has proposed to unlock value from the company through selling up to 20% of its entertainment business, which Third Point valued at about $10 billion. According to Loeb, multiple objectives could be achieved through selling a part (if not all) of Sony's entertainment division. For starters, through the sale, Sony would be able to finance the restructuring of its electronics operations. On the other hand, according to the activist investor, Sony's shareholders would get a much better valuation for the entertainment part of the business which would be currently undervalued because investors are bundling it together with the under-performing electronics division.
Sony's new CEO, Mr. Hirai, who is cutting costs at the troubled electronics side of the business, has explicitly refused to take Loeb's proposal into practice. Management's plan to cut costs at every division is a step into the right direction, but Loeb's point is undeniable. Sony's huge diversification across businesses does not make much sense at all. Spinning off the entertainment division would be the first step out of many. For example, Sony also owns 60% of a highly profitable financial company, Sony Financial Holdings (SNYFY), which is involved into banking and the life insurance business. This completely a independent business could be either entirely sold or, better yet, spin off to Sony's shareholders.
Selling TVs, making movies and writing insurance contracts are very different businesses and wrapping them together doesn’t look like a great idea, above all, when one division's under-performance (electronics) out-shines the valuation of the entire business.
Sony's management is being successful at turning around its troubled electronics division. As a matter of fact, the electronics segment turned profitable on a turn to profit for smartphones and TVs. That said, investors should be heard when there is a clear case to extract value. Through a spin-off of the movie and music business, the management could focus on its core and let owners get a better price for their assets. Sony trades at just 80% of its book value and 3.6 times EV/EBITDA, which is a fraction of the multiple the entertainment business could sell for and its also very far from the multiple Sony Financial Holdings is currently trading at (200% of the company's book value).
Bottom line, I am sure there is a clear investment case for Sony. The company's board should not interfere with investors' best interests. Let's hope they do not. Apparently, not only Loeb thinks management will finally recede. Other investors such as Charles Brandes and Mario Gabelli are also long on the name.