Loeb lobs break-up bombshell at Sony

Daniel Loeb has been buying up great swathes of Sony in a breakup attempt that could see the US hedge fund billionaire spin off the entertainment arm of the business.

by Rebecca Burn-Callander
Last Updated: 31 Oct 2013

For Sony boss Kazuo Hirai, this is a Skyfall moment. Loeb, founder of hedge fund Third Point has been steadily buying up Sony shares, amassing a 6.8% stake. This gives him quite the bargaining chip. Loeb has been in Japan for three days, attempting to convince Sony executives to allow the break-up of the group.

Insiders say that Loeb was even audacious enough to hand-deliver a letter to Hirai saying that his turnaround efforts were admirable but that Sony needed to take more decisive action.

Loeb wants to spin out the lucrative entertainment side of the Sony business, which produced blockbusters Skyfall and Django Unchained and represents the likes of Paloma Faith and Paul Simon. Loeb has offered ¥150bn-¥200bn (£978m-£1.3bn) to fund an IPO of these film and music operations. To raise a further chunk of change, Loeb proposes that Sony then sell a 15%-20% stake in that business in an offering to existing shareholders.

What lies in store for the rest of Sony’s business should Third Point’s takeover bid succeed? Loeb recommends that the company sell off its 60% stake in Sony Financial; an interesting play, given that this has proved Sony’s most consistently profitable division in recent years.

Third Point argues that this would allow Sony to concentrate on its core business: the electronics arm, which includes Sony's TV and PlayStation units. Not that Loeb would just let Sony’s executive manage that all by themselves. Oh no, Loeb would raise another round of funding to plough into the failing TV business to reduce its debt pile (and give Loeb a hefty slice of profit from any future innovations).

According to Third Point, this strategy could drive up Sony's share price by 60%, ‘if implemented properly’. However, Sony is yet to be convinced by Loeb’s siren song of cash piles and soaring shares. It has said that the entertainment arm ‘is not for sale’.

It’s an interesting time for Loeb to be making this play. Takeover attempts, as the great Sage of Omaha Warren Buffet once said, are best undertaken when the company is on the ‘operating table’. And Sony has just posted its first full-year net profit for five years (just as Japanese electronics-maker Sharp has reported a record annual loss of 545bn yen - £3.5bn - too).

Nonetheless, the uptick in Sony’s fortunes have not gone far enough to mend the damage of the past decade. In 13 years, Sony's share price has plunged by nearly 85% as Apple and ‘Sony killer’ Samsung have eaten away at its market share.

Loeb is also proposing this grand rescue just as a new strategy to depress the yen by Japan’s prime minister Shinzo Abe has started bearing fruit. Sony is one of the greatest beneficiaries of ‘Abenomics’ as foreign buyers take advantage of its cheaper wares.

Loeb may be used to throwing his weight around inside organisations like Yahoo! - he ousted a CEO and poached Marissa Mayer from Google to take his place last year. But Sony is no US internet giant looking for answers. Japanese corporations are historically extremely resistant to any meddling from outsiders. This is why they all tend to have so many cross-holdings in each other. The question is, now that his first overture has been rebuffed, what will Loeb’s next play be?

Find this article useful?

Get more great articles like this in your inbox every lunchtime

Subscribe

Get your essential reading delivered. Subscribe to Management Today