2ND UPDATE, 2:15 PM: Sony doesn’t slam the door on Third Point‘s proposal for it to sell up to a 20% stake in its entertainment assets — but doesn’t encourage the idea either. Sony “welcomes investment in the company,” SVP Corporate Communications Shiro Kambe says. But he adds: “We are focused on creating shareholder value by executing on our plan to revitalize and grow the electronics business, while further strengthening the stable business foundations of the entertainment and financial service businesses. As President and CEO Kazuo Hirai has said repeatedly, the entertainment businesses are important contributors to Sony’s growth and are not for sale, and we look forward to continuing a constructive dialogue with our shareholders as we pursue our strategy.”
UPDATE, 10:28 AM: The CBS speculation has taken on new life following this morning’s news that hedge fund Third Point wants the electronics company to create a public stock for its entertainment assets. Third Point proposed that Sony keep at least an 80% stake in the studio and music properties. Still, the plan “will concentrate investor attention” on the businesses and “the synergies that potential acquirers such as CBS might eventually realize,” says Pivotal Research Group’s Brian Wieser — who likes the idea. Sony shares are +10.5% in mid-day trading and CBS is +2.6%. Late last year Sony firmly rejected a sale after CBS’ Les Moonves mused that he “would want to look at them” if the properties were for sale. Sony execs might start to think differently if they take the movie, TV, and music assets public. The stock would give them a clearer sense of how much the properties are worth and, therefore, how much they could collect from a buyer. And Wiser believes that CBS could show that it would do a better job than Sony — which he says “has never bridged a significant cultural gap nor overcome its hierarchical bureaucracy to work better with the U.S.-centered operations.” CBS will be flush with cash soon as it prepares to sell and restructure its billboard ad properties.
Sony’s television properties include NBC’s Community and AMC’s Breaking Bad as well as Wheel Of Fortune and Jeopardy. It has a library of 50,000 episodes of 275 series including I Dream Of Jeannie, Bewitched, All In The Family, and a major stake in Seinfeld. Sony is strong globally — especially in Latin America and Asia — with 124 channels including SET, AXN and Animax and stakes in GSN and FearNet. It also owns a digital video service, Crackle.
PREVIOUS, 6:44 AM: Sony‘s U.S. shares are up more than 11.5% in early trading this morning after the hedge fund run by Daniel Loeb disclosed that it recently paid about $1.1B for a 6.4% stake — and is lobbying for the Japanese consumer electronics giant to make its film, TV, and music properties a publicly traded entity. In a letter to CEO Kazuo Hirai, Loeb says that by selling the public as much as a 20% stake in the entertainment assets Sony could maintain control and still “receive meaningful liquidity to inject into Sony Electronics.” In addition it could “push down a meaningful but sustainable portion of its debt” to the entertainment unit — and encourage management to make it more profitable by granting execs “an equity security specifically tied to a company they control.” (Third Point partnered with Deadline Hollywood parent PMC in last year’s acquisition of Variety.) The letter, disclosed this morning in The New York Times, notes that the entertainment properties “comprise over 40% of Sony’s enterprise value.” But their profit margins “fall short when benchmarked versus their U.S.-listed competitors despite superior scale and leading market positions.” Sony’s studio is estimated to generate about a 6% margin over cash flow while peers including Fox, Disney, DreamWorks Animation, and Lionsgate average about 12%. Music profit margins also are said to lag Universal Music and Warner Music.
To ensure that the creation of a Sony Entertainment stock would succeed, Third Point has offered to commit up to $2B to backstop the deal and not take a fee. The fund proposed that Sony offer current shareholders subscription rights to an entertainment entity instead of spinning it off or offering shares as a dividend. Analysts are busy trying to figure out how much Sony Entertainment might be worth. The company’s international cable networks portfolio and TV production business are “hidden gems that are overlooked by investors,” says BTIG’s Rich Greenfield.
Loeb and other Third Point execs met today with Hirai, and are also engaging with political and trade figures who play a role in the tightly knit Japanese business community. The fund’s friendly approach to Sony is a contrast to its more aggressive effort last year to change strategy and practices at Yahoo. “Third Point would not have made this substantial investment if we did not believe in a bright future for Sony’s global brand, superior technology, and dedicated employees,” Loeb says in his letter. “We are confident that by acting as partners, Sony will grow stronger.” The proposal says nothing about what Third Point might do if Sony declines to take its advice. Hostile actions are rare in Japan, but shareholders who own at least 3% of a company have the right to call for a special meeting.