Activist Dan Loeb calls on Sony to spin off its semiconductor business

Loeb is going in for seconds at Sony. (Bloomberg picture)

NEW YORK: Activist investor Dan Loeb disclosed a US$1.5 billion stake in Sony Corp and pushed the company to make dramatic changes, including spinning off its semiconductor business and listing it in Japan.

Sony’s shares rose as much as 4% in Tokyo after Loeb’s Third Point published a letter and 102-page presentation pushing for changes at the Japanese media and electronics giant, including potential sales of its stakes in a financial affiliate and companies such as Spotify Technology SA.

If Sony spins off the semiconductor business and executes on its long-term vision, the new entity could be worth US$35 billion within five years, according to the New York-based hedge fund firm. A representative for Sony declined to comment. Friday’s move gives it a gain of about 3% for the year, roughly in line with the Japanese market.

“We rarely find companies like Sony that have a depressed valuation, high-quality underlying businesses, numerous options for portfolio optimisation, and a capable management team,” Third Point said on a website entitled “A Stronger Sony.” “As a standalone public company listed in Japan, Sony Technologies would be a showcase for Japan’s technology capabilities. Rather than just an uncut rough stone buried inside Sony’s portfolio.”

Sony is the leader in image sensors used in smartphones and digital cameras. The chips business generated 144 billion yen (US$1.3 billion) in operating profit on 879 billion yen of revenue in the latest fiscal year. That’s similar in size to Analog Devices Inc and Advanced Micro Devices Inc, two companies with market values of more than US$30 billion.

But some analysts questioned the proposal, saying the chips unit is better off as part of a larger group. The division has maintained profit growth despite a slowdown in global phone sales as newer models adopt more cameras per device.

“I’m uncertain whether a spinoff would actually increase value,” said Hideki Yasuda, an analyst at Ace Research Institute. “The semiconductor industry is notoriously volatile and requires constant, huge investments. That’s easier to manage if it’s done as a part of Sony’s bigger group.”

Sony Chief Executive Officer Kenichiro Yoshida hasn’t shown interest in parting with the chips business. He underscored his commitment last month by increasing investment in image sensors to about 700 billion yen in the three years ending March 2021 and unveiled plans for new chip designs outfitted with artificial intelligence.

“By leveraging the superior technology, we have developed in this business, we expect to maintain our industry leading position going forward,” he told investors last month. “We expect this business to generate high return on investment in the long term.”

Third Point also wants sales of its stakes in Sony Financial, M3 Inc, Olympus Corp and Spotify, which it estimates currently account for about 20% of Sony’s market capitalisation. Doing so would give the company cash to invest in its main entertainment business: gaming, music and movies, it said.

Loeb was less concerned with Sony’s legacy electronics businesses, which make TVs, cameras and mobile phones. These assets are smaller than the entertainment operations and they’re “no longer the drag on profitability that they were six years ago,” Third Point said. Cash flow from electronics can be reinvested into entertainment, it added.

This is the second time Loeb has agitated for changes at Sony. In 2013, Third Point bought a stake and proposed a partial spin off and initial public offering of the company’s entertainment business. He was unsuccessful.

Loeb has been known for his aggressive tactics and so-called poison pen letters that criticise companies’ management teams. He has mellowed somewhat in recent years: a high-profile investment in Nestle SA since 2017 has been relatively cordial. Still, he can turn combative when he deems it necessary, as evidenced by a proxy fight last year with Campbell Soup Co.

Shareholder activism is still rare in Japan, so Loeb is taking the less aggressive approach for now. Third Point credited Sony’s management, under former Chief Executive Officer Kazuo Hirai and then Yoshida, for implementing dramatic changes at the company since 2014.

“Despite these substantial improvements, Sony continues to be as undervalued today as it was in 2013, trading at its lowest forward multiple of earnings in the last decade,” Third Point said.

Now that Sony is on a better path operationally, Yoshida can tackle this “by shifting his focus to unlocking the value of the company’s tremendous portfolio of assets,” Third Point said. “Today, Sony trades at roughly half our estimate of intrinsic value, with additional upside from optimizing capital allocation.”

Although Loeb’s prior attempt with Sony was unsuccessful, it did result in changes including the replacement of executives at its film division. Yoshida was Sony’s chief financial officer at the time of the last campaign, and recently said he looked back fondly on his interaction with the activist investor.

“I thought it was a good thing that we negotiated with Third Point at the time,” Yoshida said in a group interview last month. “It’s important to talk to investors. Whether you can convince them is part of running a business.”