Daniel Loeb Comments on Sony Corp - Oct 22, 2014
In May of 2013, Third Point announced a significant stake in Sony (SNE
) and suggested to the company’s CEO, Kazuo Hirai, that he should seriously consider spinning out 15‐20% of the company’s undervalued, American-based Entertainment business. At the time, we explained that partially listing the Entertainment segment would have three positive effects: 1) highlighting its profitability; 2) increasing investor transparency, thereby allowing the market to properly benchmark the company against its global media peers; and 3) incentivizing Entertainment’s management to run the company more efficiently by engaging in cost cutting and laying out clear earnings targets.
While, regrettably, the Company rejected our partial spin-out suggestion, they made some changes that were consistent with our goals. In the Entertainment business in particular, Sony has cut costs, improved its dialogue with investors, and undertaken key management changes. In Electronics, Mr. Hirai’s team deserves credit for transitioning away from personal computers this year and improving television profitability in 2015. They have also improved investor transparency. Still, they have a long way to go and we continue to believe that more urgency will be necessary to definitively turn around the company’s fortunes.
A key tenet for us in making constructivist investments is our margin of safety. While we are most focused on the potential upside available to shareholders if management undertakes changes, we are unlikely to make a significant investment in a situation where constructivist-driven change is the chief catalyst unless we see minimal downside. Sony was exactly the type of investment where the risk/reward ratio was skewed in our favor. Thanks to this investment principle, despite enduring profit warnings nearly every quarter we were invested, incurring worse news about Electronics than we expected, and suffering from market disappointment at the pace of Japanese macroeconomic reforms, we still managed to generate nearly a 20% return on this investment before exiting.
From Daniel Loeb
)’s Third Point Q3 2014 Investor Letter
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Daniel Loeb Comments on Sony - Jan 22, 2014
) – While the rejection of Third Point's proposal to partially list the Entertainment business proved costly for shareholders, we are hopeful that the Company's commitment to improve transparency, increase margins, better allocate capital among divisions, and hold division management accountable will lead to our goal: increasing shareholder value. Despite the rise in the Company share price earlier in the year, Sony shares still trade significantly below their sum of the parts valuation.
Sony started 2014 strongly at the Consumer Electronics Show in Las Vegas, winning two best-of-show awards for PlayStation 4 and the Xperia phone. The show's highlight was news that Sony had sold 4.2 million Playstation 4's in 2013 versus 3.0 million Xbox One's. Sony appears set to sustain strong global momentum with the Japanese launch of the Playstation 4 in February. February is also rumore d to mark the launch of Sony's Xperia Z2 phone, with the potential for meaningful distribution expansion in North America and elsewhere.
Progress on Sony's growth vectors, while encouraging, needs to be matched by a serious effort to restructure the PC and TV businesses as well as more concerted efforts to realize Entertainment 's value.
Japanese investors reacted favorably to management teams who took bold restructuring action in 2013, and the market is looking for Sony to pursue a similar path.
Meanwhile, we are focused on upcoming catalysts including the IPO of Japan Display indicated for 1Q ' 14, progress at VEVO, and increasing focus on Sony's considerable intellectual property portfolio. Sony, a perennial top 10 U.S. patent approval recipient (#4 in 2013) with over 50,000 patents and several distinct patent assets, including stakes in InterTrust, MobileMedia Ideas, and participation in the Rockstar Consortium, still exhibits a disconnect between the implied value of the Electronics business and the underlying value of its intellectual property.
All eyes are focused on management to reach its margin targets both within the Electronics and Entertainment divisions over the course of the coming year. We have high hopes for CEO Hirai and his lieutenants to continue their path towards greater profitability and to make difficult decisions when necessary to reach those goals
From Daniel Loeb (Trades, Portfolio)'s Third Point fourth quarter 2013 commentary.
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Daniel Loeb Comments on Sony Corporation - Jul 30, 2013
Equity Position: Sony Corporation (SNE
Third Point acquired a significant stake in Sony Corporation ("Sony") earlier this year, and in May, we unveiled a proposal to increase value by partially listing Sony's Entertainment ("Entertainment") business in the U.S. Our investment thesis is that Sony – composed of Electronics, Finance, and Entertainment – is not well understood by investors and is therefore significantly undervalued. Sony's Entertainment division has leading franchises in movie and television production and distribution via Columbia Pictures and Sony Pictures Television, and is one of the top recorded music and publishing companies in the world. Sony also has coveted global cable network assets, including a strong position in the fast-growing Indian market. Electronics is best known for its struggling televisions and VAIO computers but its true value lies in its strong semiconductor and video game console divisions, and its resurgent smartphone business. At the time we made our initial investment, we believed that at our purchase price we were acquiring Entertainment at an attractive value while receiving Electronics nearly for free, giving us a substantial margin of safety.
In addition to its appealing valuation, we believed Sony would benefit from the economic tailwinds created by the First and Second Arrows of Prime Minister Shinzo Abe's economic plan, i.e., a weaker currency and fiscal stimulus would immediately benefit Sony's margins and drive earnings per share. But it was not until we became familiar with Abe's Third Arrow that we became confident Sony was an ideal candidate to benefit from the type of structural reform recommended by his administration. Following recent victories in the Upper House, Premier Abe is now well-positioned to begin enacting his much-anticipated reforms to modernize Japan's economy and corporations. Like the rest of the world, we are eagerly awaiting these changes, which should benefit Japanese companies like Sony.
Finally, the Sony management team installed last April seems to have broken a long string of challenged leadership and has started to make some difficult decisions in the Electronics business by reducing overhead and cutting the number of products offered. Highlyregarded CEO Kazuo Hirai deserves plaudits for the green shoots increasingly visible in Electronics. Sony's Xperia Z smartphone is a hit, and new product momentum has built meaningfully over the last few months while competitors have been losing ground. Sony is introducing an array of new Xperia models, including a large screen "phablet" device, the Xperia Z Ultra, and new Xperia C and SP devices for China Unicom and China Mobile. The launch of Sony's refreshed Xperia line has been a success in Japan, where Sony has overtaken Apple as#1 in smartphone market share, and in Europe, where Sony has risen to #3 in smartphone share. The upcoming launch of the Honami smartphone and other products in China and the U.S. should offer further opportunities for Sony to gain share in smartphones.
Strong momentum in the smartphone business has been accompanied by a perfectly executed introduction of the PlayStation 4 ("PS4") platform. The PS4 is set to gain share versus its competitors – the Wii and Xbox – with better hardware performance, new title breadth, and attractive launch pricing. Sony's consumer-friendly approach also stands to benefit investors with better initial hardware margins than PlayStation 3, increased market share and the growth, revenue and profit contributions ofthe PlayStation Network. The visible improvement in Sony's new products has caused us to rethink our approach to valuing Electronics. The Game and Mobile Products divisions are now poised to join the Devices business as meaningful profit contributors, while the Television business is becoming only a marginal drag.
Putting these encouraging gains into perspective, they are modest in light of the longerterm challenges facing Sony and the Japanese electronics industry. Drastic – rather than incremental – action is required. Third Point's proposal to partially list Entertainment should not only increase overall profitability but also provide capital to accelerate restructuring at Electronics, against a backdrop of increasingly fierce global competition. Turning to another challenge: unlike Electronics, Entertainment remains poorly managed, with a famously bloated corporate structure, generous perk packages, high salaries for underperforming senior executives, and marketing budgets that do not seem to be in line with any sense of return on capital invested. We were surprised that after Entertainment's highly-touted big budget summer film releases – After Earth and White House Down – bombed spectacularly at the box office, CEO Hirai, speaking at the Allen & Co. Sun Valley conference a few weeks ago, brushed off these failures, saying:
"I don't worry about the Entertainment business, it's doing just fine"
We find it perplexing that Mr. Hirai does not worry about a division that has just released 2013's versions of Waterworld and Ishtar back-to-back, instead giving free passes to Sony Pictures Entertainment Co-CEO's Michael Lynton and Amy Pascal, the executives responsible for these debacles. Unfortunately, Mr. Hirai's remark is consistent with accounts we have heard repeatedly from key industry players and others: under Mr. Lynton and Ms. Pascal's leadership, Entertainment's culture is characterized by a complete lack of accountability and poor financial controls. To us, these latest blunders are prima facie evidence of our thesis that Entertainment's U.S.-based business is being ineffectively overseen and needs its own governance structure led by a board whose job it will be to worry about such troubling results.
We are also surprised that Sony's CEO does not worry that Entertainment continues to generate profitability levels far below those of its competitors. Based on publicly-available peer data as of March 31, 2013, Entertainment has trailing twelve month EBITDA margins that are 700 basis points below peers in the Pictures division and 380 basis points below peers in the Music division, despite the fact that each is an industry leader in revenue terms. If Entertainment achieved peer margins, EBITDA could increase nearly $800 million to just over $2.0 billion.
Entertainment's poor relative performance has been a chronic phenomenon extending back to the famously profligate Guber-Peters regime, suggesting the current configuration of these businesses – far from offering synergies to shareholders – is in fact undermining Sony's value potential. Keeping Entertainment underexposed, undervalued and underperforming is not a strategy for success. Sony's investors today would be hardpressed to explain the composition of Entertainment or the key value drivers at work. While management goes to great lengths to explain the strategy for Electronics, it treats Entertainmentlike its "red-headed stepchild", addressing itin only three slides in a twentysix slide analyst day presentation made just a week after Third Point announced its proposal. At a moment when Entertainment was of paramount interest to investors, management barely addressed its significance, business strategy or profitability expectations. Given Entertainment's perpetual underperformance, perhaps Sony's reluctance to discuss it candidly stems from (understandable) embarrassment.
From a creative point of view, we are concerned about Entertainment's 2014 and 2015 slate, which lacks lucrative "tent pole" franchises. Anecdotally, we understand that its development pipeline is bleak, despite overspending on numerous projects. We are also disappointed to see that Sony's television business lacks new material and instead relies on old Merv Griffin Productions workhorses like Jeopardy and Wheel of Fortune. Entertainment has no hit network television shows, only one major syndicated network show– the Dr. Oz Show, and has missed the market for unscripted television.
Meanwhile, our research continues to reveal Entertainment's hidden value. We believe the Pictures unit profitability is anchored in higher margin (and higher multiple) international cable networks and television production, with the film business offering negligible profitability. This makes apples-to-apples comparisons with peer film studios (which lack the benefit of cable networks in those segments) even more unflattering. Nevertheless, we believe the film unit possesses considerable library cash flow value, currently masked by poor new production profitability, as well as significant asset value in its Culver City lot. Beyond the hidden value in the film business, we see meaningful value in the Music division, particularly in VEVO and GraceNote.
Absent a major improvement in transparency and accountability, Entertainment's fortunes are unlikely to change and Sony's full potential will remain unrealized. We are continuing to study Entertainment's businesses, uncovering opportunities for improvement in strategy, culture and operations that bolster our view that it would benefit significantly from our proposal. The suggestion that the status quo of opacity, underperformance and under-management is superior to transparency, management accountability and distinct leadership seems to be based on the misguided notion that the status quo strategy has worked over the last two decades. By contrast, our proposal for a public listing of Entertainment provides investors with a compelling opportunity – offering focused leadership, direct exposure to high-value international cable networks, significant margin improvement head-room, structural catalysts, hidden asset values and capital return. The status quo offers Sony and its shareholders only more of the same unfulfilled potential.
While CEO Hirai focuses on Electronics, Entertainment is in desperate need of proper supervision. We believe Sony's Board, which we understand continues to consider our suggestions, has plenty of reasons to worry about Entertainment and should enact our partial listing proposal quickly. A resurgent Electronics combined with a well-managed, publicly-listed Entertainment business would make for a stronger Sony and offer tremendous value for shareholders.
From Third Point's second quarter 2013 letter
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