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Sony Suffering Seen as Prelude to Loeb-Inspired Revamp: Real M&A
2014-02-10 21:43:31.264 GMT
(For a Real M&A column news alert: SALT REALMNA <GO>.)
By Brooke Sutherland, Tara Lachapelle and Cliff Edwards
Feb. 10 (Bloomberg) -- Sony Corp.’s latest earnings
disappointment held a silver lining: the company’s willingness
to entertain some of activist investor Daniel Loeb’s
suggestions. And it may be just the beginning.
The Tokyo-based company forecast a $1.1 billion annual loss
as it sells the personal-computer business and splits the TV-
manufacturing division into a separate unit that it may divest
eventually. While falling short of Loeb’s calls for a bigger
breakup, the moves sparked an 11 percent jump in the shares last
week, and followed a pledge to provide more transparency in
Sony’s financial statements.
“This goes a long way towards what Dan Loeb was talking
about,” Lawrence Haverty, a fund manager at Gamco Investors
Inc. in Rye, New York, said in a phone interview. Gamco oversees
$47 billion and owns Sony shares. “I like the idea of first
things first and one step at a time. There’s an awful lot of
really encouraging stuff that’s happening.”
More changes are needed at the $17 billion company, said
Hudson Square Research Inc., which suggests spinning off a
portion of Sony Entertainment, the unit that encompasses film
and music, as Loeb suggested last May. Or Sony could follow the
lead of rival Panasonic Corp. and continue to sell off pieces of
its electronics business, said Jefferies Group LLC. Sony’s
insurance and banking unit, which contributed the most operating
income in the year ended March 2013, also could be split off as
a separate company, Gamco’s Haverty said.
John Dolak, a spokesman for Sony in the U.S., didn’t
respond to a phone call or e-mail requesting comment. A
representative for Sony in Japan didn’t respond to an e-mail
sent after normal business hours.
Loeb Push
Loeb, who heads hedge fund Third Point LLC, urged Sony in
May to sell as much as 20 percent of its entertainment division
in an initial public offering so that the company could focus on
turning around the struggling electronics business. At the time,
shareholders had lost more than $100 billion in market value
since 2000, according to data compiled by Bloomberg.
After Sony Chief Executive Officer Kazuo Hirai and the
board rejected the proposal in August, the activist investor
said he was “disappointed” with the decision and intended to
“explore further options to create value for Sony
shareholders.” Last month, Third Point called for a “serious
effort to restructure the PC and TV businesses,” according to a
letter sent to the hedge fund’s investors.
Third Point declined to comment last week.
Right Direction
Sony announced Feb. 6 that it’s selling the Vaio computer
business to buyout firm Japan Industrial Partners Inc. and
splitting its TV manufacturing unit into a separate operating
entity. CEO Hirai also said he hasn’t ruled out a divestiture of
the TV division in the future after receiving “various
offers.”
The company’s shares had their the biggest three-day gain
in more than eight months on news of the sale. Before the rise,
Sony had dropped 18 percent since Loeb first pushed for changes.
Separating “the TV segment and selling the PC business are
steps in the right direction to unlock value,” Todd Lowenstein,
a Los Angeles-based fund manager at HighMark Capital Management
Inc., which oversees about $17 billion, wrote in an e-mail.
Sony has more to do and should reconsider Loeb’s advice on
the entertainment spinoff, according to Daniel Ernst, a New
York-based analyst at Hudson Square. The unit makes the
“Spider-Man” movies and represents music artists such as Miley
Cyrus.
Undervalued Shares
Sony is cheaper than most of its peers. Last week, it was
valued at a 28 percent discount to its net assets. Consumer
electronics makers with market values exceeding $1 billion have
a median price-book ratio of 1.7, data compiled by Bloomberg
show.
“The shares are quite undervalued,” Albert Saporta, the
head of research at Makor Capital Ltd. and a managing director
at AIM&R, said in a phone interview. ‘We’re pretty much on the
same wavelength as Daniel Loeb.’’
Based on the sum of its parts, Sony should be valued at
least 50 percent more than last week, Haverty of Gamco said.
That implies about $25 per American depositary receipt, or about
2,500 yen a share. The stock closed at 1,691 yen last week.
Today, Sony shares gained 0.7 percent to 1,702 yen. Its
ADRs fell 0.8 percent to $16.68.
Sony could consider spinning off its financial services
unit, which is consistently profitable and could exist on its
own, Haverty said. The company sold shares in the division in
2007 and currently retains a majority stake in the unit, which
has a market value of about $7 billion.
Electronics Exit?
Others think Sony’s focus should instead be on selling more
assets in its consumer electronics division. Competitor
Panasonic has jumped about 57 percent in the last 12 months in
part because of shrinking its TV and handset business, and Sony
should take note, according to Atul Goyal of Jefferies.
“For them, salvation is an exit from electronics,” Goyal
said in an interview last week with Bloomberg Television. “If
there’s any buyer whatsoever in the electronics business -- and
there might still be some today for TV and others -- get out
now.”
Besides TV’s, Sony makes products including digital
cameras, headphones, MP3 players and speakers.
While Haverty said he would be happy to see Sony break up,
he’s optimistic about the prospects for the TV business, which
he said is showing the most promise among Sony’s electronics
products. Sony may make a comeback in the next 18 months as the
company introduces ultra high definition TV sets that cost as
much as $25,000 to meet consumer demand, he said.
‘New Cycle’
“The consumer electronics business, I don’t really want to
be an owner of that,” Haverty said. “But within electronics,
investors have a shot at making money on the television
business. It has a shot of working because we’re going into this
new cycle.”
It’s difficult for Japanese companies to make drastic
changes, said Masahiko Fukasawa, co-Japan representative and
managing director at AlixPartners LLP.
“Discussions over strategy at Japanese companies are
veiled in a haze,” Fukasawa said. “It’s hard for them to make
a decision to dispose of a business that is sometimes profitable
and sometimes not. In our view, it’s a waste of resources trying
to sustain a business with little expectation for growth.”
While Sony’s management may not think seriously about a
transformation unless performance suffers even more, the moves
announced last week signal at least somewhat of a shift in the
company’s attitude toward the consumer electronics business,
according to Goyal of Jefferies.
“These are the first baby steps in the right direction,”
the analyst said. “If they continue, that’s a good sign.”
For Related News and Information:
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--With assistance from Mariko Yasu in Tokyo and Beth Jinks in
New York. Editors: Beth Williams, Sarah Rabil
To contact the reporters on this story:
Brooke Sutherland in New York at +1-212-617-0448 or
bsutherland7@bloomberg.net;
Tara Lachapelle in New York at +1-212-617-8911 or
tlachapelle@bloomberg.net;
Cliff Edwards in San Francisco at +1-415-617-7074 or
cedwards28@bloomberg.net
To contact the editors responsible for this story:
Sarah Rabil at +1-212-617-5992 or
srabil@bloomberg.net;
Anthony Palazzo at +1-323-782-4228 or
apalazzo@bloomberg.net