(Bloomberg) -- Dan Loeb is back trying to whip Sony Corp. into shape, but he’s drawing fire this time around after reversing course from his prior thesis.
Loeb’s Third Point last week revealed a $1.5 billion stake in the Tokyo-based company and advocated for a spin off of its chip business to finance deeper expansion in entertainment, including games and movies. That’s the opposite of what he championed in 2013, when he called on executives to sell a part of their film division.
“Loeb advocated for moving away from entertainment, but Sony is thriving today precisely because they went in the opposite direction," said Masahiko Ishino, an analyst at Tokai Tokyo Research Center, referring to both movies and games. "Amid trade wars, losing chips would be a negative in terms of Japan’s national security. It’s not something that needs to be done right now."
The cool reception came as Sony stakeholders gathered in Tokyo on Tuesday for the company’s annual general meeting. Loeb’s proposals are not up for a vote, although analysts said he will likely be a main topic of conversations among shareholders. Sony declined to comment on the Third Point proposal, but said it takes all shareholder suggestions seriously.
Chief Executive Officer Kenichiro Yoshida repeated that message Tuesday, saying management is constantly studying how to increase long-term shareholder value. “That includes deliberations about how to structure our portfolio of businesses,” he said.
Loeb laid out his thesis personally to Yoshida last week in New York. The CEO mostly listened and didn’t rebuff the activist in terms of valuation or feasibility of implementing the proposals, giving Third Point more confidence to move ahead.
The hedge fund sees Sony as a different company from six years ago, which is why its focus has changed from shunning entertainment to embracing it. Sensing an opening with Yoshida’s more investor-friendly approach, Loeb is trying again with what he believes he can realistically achieve. The next step is getting a formal reaction from management.
Analysts almost universally applauded his effort last week to reduce Sony’s so-called "conglomerate discount," or the idea that its many disparate businesses -- from entertainment to chips to finance -- are collectively undervalued and would benefit from being split apart. But they questioned whether Third Point’s proposals are realistic or make strategic sense.
For one, some are not convinced that a standalone chip unit can finance the large investments necessary for growth and said it’s better done as part of a bigger group, which can offset temporary losses. They also argued that the unit currently enjoys strong synergy with Sony’s other product divisions and should be integrated more closely rather than spun out.
“We think that spinning off the semiconductor business could in fact reduce its actual value,” Yasuo Nakane and Kenichi Saita, analysts at Mizuho Financial Group Inc., wrote in a report. “The semiconductor subsidiary’s technological assets and intellectual properties are inseparable from the electronics products and solutions.”
Others questioned Loeb’s estimate for how much a standalone chips unit could fetch at a time when global phone sales are shrinking and the U.S. is waging war on one of Sony’s largest customers, Huawei Technologies Co.
“We think Third Point’s US$33-39bn valuation is too high,” wrote Macquarie Group analysts Damian Thong and Hiroshi Taguchi, who currently value the chips division at $11 billion. "But there is wide scope for price discovery above the current embedded value."
Then there’s the issue of Sony’s historically stubborn management. Yoshida has so far side-stepped calls to sell or spin off businesses. Instead, he has carried out two record buybacks this year, pleasing investors and preempting calls for more drastic change. And at $1.5 billion, Loeb’s new stake represents about a third of the 6.5% of voting shares he accumulated in 2013.
“Third Point’s key proposals about the divestiture of Sony Financial and spin-off of the semiconductor business are unlikely to be easily accepted by management," wrote CLSA analyst Amit Garg. Still, he said the company could yield given that the buybacks "have failed, with the stock remaining at depressed multiples."
Loeb is probably not helping his case by saying that sell-side analysts are part of the problem. In his presentation, he said a lack of familiarity with Sony’s many different businesses results in analysts applying discounts to divisions they’re unfamiliar with, contributing to a lower valuation for the entire company.
“The lack of entertainment sector expertise among Sony’s sell‐side analysts may explain the wide skew in valuation methodologies, multiples, and target prices,” Third Point wrote in its presentation last week. "We sympathize with the challenge they face: maintaining an up‐to‐date, informed view on a diverse range of industries, most of which are outside their core expertise."
(Updates with CEO’s comment from the fifth paragraph.)
--With assistance from 院去信太郎 and Kurt Schussler.
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