Sony Taking Loeb Breakup Advice Better Late Than Never: Real M&A
2014-05-18 21:00:01.0 GMT
(For a Real M&A column news alert: SALT REALMNA <GO>.)
By Brooke Sutherland, Grace Huang and Cliff Edwards
May 19 (Bloomberg) -- One year and about $2 billion in lost
market value later, it may be time for Sony Corp. to take Daniel
Loeb’s advice about breaking up.
Even after making restructuring attempts such as the sale
of its personal computer division, Sony remains 12 percent lower
than when activist investor Loeb first urged a separation of the
entertainment business last May so that the company could focus
on its struggling electronics business. This week, Sony forecast
an annual loss, its sixth in seven years, mostly because of
swelling restructuring charges. The shares have plunged 8.8
percent since.
“Last year there was some hope, and now we’re seeing a
capitulation of that hope,” Daniel Ernst, an analyst at Hudson
Square Research Inc. in New York, said in a phone interview.
“The worse the electronics part of the company does, the more
pressure there will be to look at” Loeb’s suggestion.
While Sony is banking on ultra-high definition, or 4K,
televisions and high-end smartphones to reverse the declines in
its electronics unit, those products won’t be the saving grace
it needs, Ernst said. Separating the entertainment division,
which makes the “Spider-Man” films and represents music
artists such as Miley Cyrus, would let investors value the more
profitable parts of Sony separately while it tries to fix
electronics, according to RiverFront Investment Group LLC.
Based on the sum of its parts, Sony could be valued at
2,090 yen a share, 27 percent more than last week, according to
Atul Goyal of Jefferies Group LLC. Bedell Frazier Investment
Counselling LLC’s estimate suggests an even higher premium of as
much as 53 percent.
Good/Bad
A breakup is “long overdue,” Chris Konstantinos, who
helps oversee about $4.5 billion as director of international
portfolio management at RiverFront in Richmond, Virginia, said
in a phone interview. “You could almost do what I would term a
‘good bank/bad bank’ type of scenario.”
Loeb’s Third Point LLC urged Sony last May to sell as much
as 20 percent of its profitable entertainment unit in an initial
public offering so the Tokyo-based company could focus on the
electronics division.
While Sony rejected the plan in August, it said in February
it would sell its PC business to buyout firm Japan Industrial
Partners Inc. and also split its TV manufacturing unit into a
separate operating entity. Chief Executive Officer Kazuo Hirai
said he hasn’t ruled out a divestiture of that business.
Sony is “focused on creating shareholder value by
executing on our plan to revitalize and grow the electronics
business, while further strengthening the entertainment and
financial service businesses,” spokeswoman Ayano Iguchi wrote
in an e-mail May 15.
A representative for Loeb declined to comment.
Market Pressure
This week, Sony reported a 26 billion yen operating loss
for the TV-making business in the year ended March 31, which the
company said brings the unit’s total operating losses over the
past decade to about 790 billion yen ($7.8 billion). It also
projected a 50 billion yen companywide net loss for this year.
The stock dropped to 1,646 yen last week, compared with
1,877 yen at the time of Loeb’s suggestion last May. Sony
climbed as high as 2,295 yen in July before it rejected his
proposal the next month.
“Pressure is mounting,” Mike Frazier, president and CEO
of Bedell Frazier, which oversees about $400 million including
Sony American depositary receipts, said in a phone interview.
The market has “been frustrated for a while, but even the bull
case is starting to get frustrated. For the time being, we’re
staying in there but we’re contemplating our next move.”
Disparate Units
Sony’s operations sprawl from film and music studios to TV
and camera products to PlayStation video games and consoles. It
also offers financial services, such as life insurance.
“What does the film entertainment and the audio
entertainment businesses have to do really with PlayStation or
with TV sets or with camera modules? The answer is not much,”
said Brian Barish, president of Denver-based Cambiar Investors
LLC, which oversees about $11 billion, including Sony ADRs.
“The chorus to break off the entertainment assets from the rest
will grow much louder.”
A breakup would make it easier for investors to assess the
disparate units, said Konstantinos of RiverFront. One way of
doing that would be to put higher-growth divisions, including
PlayStation and entertainment, in one business and more
commoditized operations, like TV, in a “cash cow” business
focused on buybacks and dividends, he said.
Conglomerate Distaste
“I tend to be one of those investors who doesn’t
appreciate having to look at conglomerates,” Konstantinos said.
By splitting a company into two “not only are you allowing
shareholders to choose for themselves which sort of investment
style they want to pursue, you’re also freeing up management.”
Sony’s electronics business could use the extra attention,
said Ernst of Hudson Square. The cost cutting and restructuring
only go so far and those actions don’t solve the problem of
reviving revenue, he said.
“What Sony really needs is new product momentum,” Ernst
said. “Based on what we see now, I don’t see that in
electronics.”
While the company projected a 28 percent jump in mobile
products revenue this year and 17 percent growth for TV sales,
the forecasts are too optimistic, according to Masahiko Ishino,
a Tokyo-based analyst at Advanced Research Japan Co.
Trailing Smartphones
In smartphones, the company faces competition in the high-
end market from South Korea’s Samsung Electronics Co. and Apple
Inc., based in Cupertino, California. Sony accounted for 3.8
percent of global smartphone sales in 2013, a fraction of
Samsung’s 31 percent and Apple’s 15 percent, according to data
compiled by Bloomberg from International Data Corp.
“They’ve got competitive threats from many different
angles they didn’t have in years past,” Ben Bajarin, an analyst
at consulting firm Creative Strategies Inc., said by phone.
Excitement about 4K TV sets -- which Sony has touted as
central to reviving that unprofitable unit -- will weaken as
eventually most TVs offer that quality, said Goyal of Jefferies.
Those challenges may argue for getting rid of the
electronics business altogether, he said.
Others, such as Lawrence Haverty of Gamco Investors Inc.,
are more bullish on the electronics business. Industrywide sales
of 4K TVs are poised to leap more than 11-fold from 2013 to
2018, according to IDC.
Sony also has already taken steps to get the company on the
right track, said Amir Anvarzadeh, manager of Japanese equity
sales in Singapore at BGC Partners Inc., who says he had been
bearish on the company for years, until recently.
Looking Better
“For the first time over the last four or five months, I
am seeing real signs that the company is doing all the right
things,” Anvarzadeh said by phone. “You could argue that it’s
come too late, but we are where we are and the question is, ‘How
would you restructure this business at this stage?’”
Severing ties between the electronics and entertainment
operations now would be a mistake, he said.
“For Sony to give up its best businesses, its highest
cash-flow generating businesses, when it needs it the most,
doesn’t makes any sense,” Anvarzadeh said. “It makes sense for
a pirate like Loeb.”
Even so, investors should be allowed to choose which part
of the business they want to invest in, said Konstantinos of
RiverFront. A breakup could be “the next logical step,” he
said.
“It seems like the electronics business in general
continues to just disappoint,” Konstantinos said. “After some
of the bad quarters they’ve had, some people were starting to
get the idea that maybe all the bad news was priced in. This was
sort of a wake-up call. It’s ripe for some sort of shake-up.”
For Related News and Information:
Sony Plunges After Surprise Loss Forecast Amid Restructuring
NSN N5LRUM6TTDSY<GO>
Loeb Pushes for Sony Breakup With Entertainment IPO Proposal
NSN MMT2F06S972K<GO>
Sony Suffering Seen as Prelude to Loeb-Inspired Revamp: Real M&A
NSN N0SV0J6VDKHT<GO>
Sony deal news: 6758 JT <equity> TCNI MNA <GO>
Real M&A columns: NI REALMNA <GO>
Top deal news: DTOP <GO>
--With assistance from Aaron Clark in Tokyo and Angus Whitley in
Sydney.
To contact the reporters on this story:
Brooke Sutherland in New York at +1-212-617-0448 or
bsutherland7@bloomberg.net;
Grace Huang in Tokyo at +81-3-3201-2006 or
xhuang66@bloomberg.net;
Cliff Edwards in San Francisco at +1-415-617-7074 or
cedwards28@bloomberg.net
To contact the editors responsible for this story:
Beth Williams at +1-212-617-2307 or
bewilliams@bloomberg.net;
Michael Tighe at +852-2977-2109 or
mtighe4@bloomberg.net
Whitney Kisling
2014-05-18 21:00:01.0 GMT
(For a Real M&A column news alert: SALT REALMNA <GO>.)
By Brooke Sutherland, Grace Huang and Cliff Edwards
May 19 (Bloomberg) -- One year and about $2 billion in lost
market value later, it may be time for Sony Corp. to take Daniel
Loeb’s advice about breaking up.
Even after making restructuring attempts such as the sale
of its personal computer division, Sony remains 12 percent lower
than when activist investor Loeb first urged a separation of the
entertainment business last May so that the company could focus
on its struggling electronics business. This week, Sony forecast
an annual loss, its sixth in seven years, mostly because of
swelling restructuring charges. The shares have plunged 8.8
percent since.
“Last year there was some hope, and now we’re seeing a
capitulation of that hope,” Daniel Ernst, an analyst at Hudson
Square Research Inc. in New York, said in a phone interview.
“The worse the electronics part of the company does, the more
pressure there will be to look at” Loeb’s suggestion.
While Sony is banking on ultra-high definition, or 4K,
televisions and high-end smartphones to reverse the declines in
its electronics unit, those products won’t be the saving grace
it needs, Ernst said. Separating the entertainment division,
which makes the “Spider-Man” films and represents music
artists such as Miley Cyrus, would let investors value the more
profitable parts of Sony separately while it tries to fix
electronics, according to RiverFront Investment Group LLC.
Based on the sum of its parts, Sony could be valued at
2,090 yen a share, 27 percent more than last week, according to
Atul Goyal of Jefferies Group LLC. Bedell Frazier Investment
Counselling LLC’s estimate suggests an even higher premium of as
much as 53 percent.
Good/Bad
A breakup is “long overdue,” Chris Konstantinos, who
helps oversee about $4.5 billion as director of international
portfolio management at RiverFront in Richmond, Virginia, said
in a phone interview. “You could almost do what I would term a
‘good bank/bad bank’ type of scenario.”
Loeb’s Third Point LLC urged Sony last May to sell as much
as 20 percent of its profitable entertainment unit in an initial
public offering so the Tokyo-based company could focus on the
electronics division.
While Sony rejected the plan in August, it said in February
it would sell its PC business to buyout firm Japan Industrial
Partners Inc. and also split its TV manufacturing unit into a
separate operating entity. Chief Executive Officer Kazuo Hirai
said he hasn’t ruled out a divestiture of that business.
Sony is “focused on creating shareholder value by
executing on our plan to revitalize and grow the electronics
business, while further strengthening the entertainment and
financial service businesses,” spokeswoman Ayano Iguchi wrote
in an e-mail May 15.
A representative for Loeb declined to comment.
Market Pressure
This week, Sony reported a 26 billion yen operating loss
for the TV-making business in the year ended March 31, which the
company said brings the unit’s total operating losses over the
past decade to about 790 billion yen ($7.8 billion). It also
projected a 50 billion yen companywide net loss for this year.
The stock dropped to 1,646 yen last week, compared with
1,877 yen at the time of Loeb’s suggestion last May. Sony
climbed as high as 2,295 yen in July before it rejected his
proposal the next month.
“Pressure is mounting,” Mike Frazier, president and CEO
of Bedell Frazier, which oversees about $400 million including
Sony American depositary receipts, said in a phone interview.
The market has “been frustrated for a while, but even the bull
case is starting to get frustrated. For the time being, we’re
staying in there but we’re contemplating our next move.”
Disparate Units
Sony’s operations sprawl from film and music studios to TV
and camera products to PlayStation video games and consoles. It
also offers financial services, such as life insurance.
“What does the film entertainment and the audio
entertainment businesses have to do really with PlayStation or
with TV sets or with camera modules? The answer is not much,”
said Brian Barish, president of Denver-based Cambiar Investors
LLC, which oversees about $11 billion, including Sony ADRs.
“The chorus to break off the entertainment assets from the rest
will grow much louder.”
A breakup would make it easier for investors to assess the
disparate units, said Konstantinos of RiverFront. One way of
doing that would be to put higher-growth divisions, including
PlayStation and entertainment, in one business and more
commoditized operations, like TV, in a “cash cow” business
focused on buybacks and dividends, he said.
Conglomerate Distaste
“I tend to be one of those investors who doesn’t
appreciate having to look at conglomerates,” Konstantinos said.
By splitting a company into two “not only are you allowing
shareholders to choose for themselves which sort of investment
style they want to pursue, you’re also freeing up management.”
Sony’s electronics business could use the extra attention,
said Ernst of Hudson Square. The cost cutting and restructuring
only go so far and those actions don’t solve the problem of
reviving revenue, he said.
“What Sony really needs is new product momentum,” Ernst
said. “Based on what we see now, I don’t see that in
electronics.”
While the company projected a 28 percent jump in mobile
products revenue this year and 17 percent growth for TV sales,
the forecasts are too optimistic, according to Masahiko Ishino,
a Tokyo-based analyst at Advanced Research Japan Co.
Trailing Smartphones
In smartphones, the company faces competition in the high-
end market from South Korea’s Samsung Electronics Co. and Apple
Inc., based in Cupertino, California. Sony accounted for 3.8
percent of global smartphone sales in 2013, a fraction of
Samsung’s 31 percent and Apple’s 15 percent, according to data
compiled by Bloomberg from International Data Corp.
“They’ve got competitive threats from many different
angles they didn’t have in years past,” Ben Bajarin, an analyst
at consulting firm Creative Strategies Inc., said by phone.
Excitement about 4K TV sets -- which Sony has touted as
central to reviving that unprofitable unit -- will weaken as
eventually most TVs offer that quality, said Goyal of Jefferies.
Those challenges may argue for getting rid of the
electronics business altogether, he said.
Others, such as Lawrence Haverty of Gamco Investors Inc.,
are more bullish on the electronics business. Industrywide sales
of 4K TVs are poised to leap more than 11-fold from 2013 to
2018, according to IDC.
Sony also has already taken steps to get the company on the
right track, said Amir Anvarzadeh, manager of Japanese equity
sales in Singapore at BGC Partners Inc., who says he had been
bearish on the company for years, until recently.
Looking Better
“For the first time over the last four or five months, I
am seeing real signs that the company is doing all the right
things,” Anvarzadeh said by phone. “You could argue that it’s
come too late, but we are where we are and the question is, ‘How
would you restructure this business at this stage?’”
Severing ties between the electronics and entertainment
operations now would be a mistake, he said.
“For Sony to give up its best businesses, its highest
cash-flow generating businesses, when it needs it the most,
doesn’t makes any sense,” Anvarzadeh said. “It makes sense for
a pirate like Loeb.”
Even so, investors should be allowed to choose which part
of the business they want to invest in, said Konstantinos of
RiverFront. A breakup could be “the next logical step,” he
said.
“It seems like the electronics business in general
continues to just disappoint,” Konstantinos said. “After some
of the bad quarters they’ve had, some people were starting to
get the idea that maybe all the bad news was priced in. This was
sort of a wake-up call. It’s ripe for some sort of shake-up.”
For Related News and Information:
Sony Plunges After Surprise Loss Forecast Amid Restructuring
NSN N5LRUM6TTDSY<GO>
Loeb Pushes for Sony Breakup With Entertainment IPO Proposal
NSN MMT2F06S972K<GO>
Sony Suffering Seen as Prelude to Loeb-Inspired Revamp: Real M&A
NSN N0SV0J6VDKHT<GO>
Sony deal news: 6758 JT <equity> TCNI MNA <GO>
Real M&A columns: NI REALMNA <GO>
Top deal news: DTOP <GO>
--With assistance from Aaron Clark in Tokyo and Angus Whitley in
Sydney.
To contact the reporters on this story:
Brooke Sutherland in New York at +1-212-617-0448 or
bsutherland7@bloomberg.net;
Grace Huang in Tokyo at +81-3-3201-2006 or
xhuang66@bloomberg.net;
Cliff Edwards in San Francisco at +1-415-617-7074 or
cedwards28@bloomberg.net
To contact the editors responsible for this story:
Beth Williams at +1-212-617-2307 or
bewilliams@bloomberg.net;
Michael Tighe at +852-2977-2109 or
mtighe4@bloomberg.net
Whitney Kisling