Shares of Sony Corp. (SNE, Financial) popped 3.34% Friday after Third Point investor Daniel Loeb (Trades, Portfolio) called it "one of the most undervalued large cap businesses" in the world and unveiled his plan to break it up.
Loeb, who has invested $1.5 billion of his firm’s $17.5 billion in assets in the Japan-based electronics and entertainment company, attributed Sony’s “valuation discount” to “portfolio complexity.” To correct the problem, Loeb proposed that it spin off its semiconductors division, one of its four segments, as a publicly traded company named Sony Technologies. The division, which has a 70% market share, contributes only 18% of Sony’s consolidated earnings, Loeb noted.
In a letter to Sony’s board Thursday, Loeb further pressed the company to grow the remaining segments into a “leading global entertainment company.” He also asked them to divest the company’s public equity stakes in Sony Financial, M3 Inc., Olympus and Spotify (SPOT, Financial). Last, he called for it to “optimize” its capital structure, which would include reinvesting the money from divestures of the public stakes and increasing leverage to be more in line with its industry peers.
“We have seen countless ‘conglomerate discounts’ over the years where investors consistently discount valuation or avoid certain stocks altogether due to the challenges of forecasting numerous, unrelated business drivers,” Loeb said in the letter.
Loeb’s investment in Sony is his second in six years. He previously built a stake valued around $1.1 billion and agitated for to spin off its entertainment business in 2013. After the company improved its earnings and slashed thousands of jobs, he exited with a 20% profit in 2014. In a letter to investors at the time, he said that Sony still had “a long way to go and we continue to believe that more urgency will be necessary to definitively turn around the company’s fortunes.”
Despite the stock rising in price by around 140% since his first letter in May 2013, Loeb said he believes Sony is “as undervalued today” as it was then, with its lowest forward earnings multiple in 10 years.
GuruFocus data shows that Sony has a price-earnings ratio of 7.8, near its lowest in a decade. Meanwhile, profitability has improved since Loeb’s last involvement. After turning in losses of over a $1 billion each in 2013 and 2014, the company grew net earnings from $1.31 billion in 2016 to $8.24 billion in 2018.
If Loeb’s pressure results in a higher stock price, a number of well-known investors who have piled into the company could benefit. Value firm Primecap Management is Sony’s largest stakeholder with 3.33% of shares. Mario Gabelli (Trades, Portfolio)’s Gamco Investors has a 0.56% stake, Gabelli Funds owns 0.21% and Jim Simons (Trades, Portfolio)’ quantitative fund Renaissance Technologies Corp. reports 0.25%.
Sony’s stock ended the day up 3.71% at $51.52 per share.
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