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The Third Point strategy: Japan macro and US merger arbitration

Marc Wiersum, MBA

Dan Loeb’s Third Point Japan strategy is poised for perfection (Part 1 of 8)

Asymmetry of risk: More upside than downside

The below graph reflects the price performance of some of Third Point’s key equity investments that are central to the fund’s Japan and global wireless strategy. Given Third Point’s thesis that the wireless market is poised to “morph into a global-scale game,” the below holdings reflect a core investment thesis that holds promise for 2014 and beyond. This strategy captures the upside of global economic themes while mitigating the downside risk of overall market risk and holds promise as 2014 unfolds. This series examines the Japanese economy in conjunction with Third Point’s overall long Japan position in Softbank and Sony. More specifically, this series focuses on the consumer portion of the Japanese economy, which is seeing a strong recovery since Japan’s new Prime Minister was elected in 2012 and has since rolled out growth-oriented monetary and fiscal policies.

For more detailed analysis of the overall Japanese economy, please see The Bank of Japan Tankan supports a 2014 Japanese equity rally.

The Softbank connection

In Japan, Third Point is definitely in good company. Softbank’s Masayoshi Son is Japan’s key technology entrepreneur and banker, whose global ambitions and achievements in telecom are exceptional, as reflected in his recent Sprint acquisition and ongoing merger initiatives with T-Mobile USA.

The Sony connection

Third Point’s holdings in Sony are obscured though its use of return swaps on the Sony equity, as well as the holding of Sony convertible bonds by Signum Coral Ltd., a special-purpose vehicle set up by Goldman Sachs to repackage 2012 convertible bonds—bonds that can be converted into common equity at a future date. These convertible bonds probably relate to the 150 billion yen of five-year zero-coupon bonds convertible to Sony shares at 957 yen per share arranged in November 2012—just before the new Prime Minister was elected and the Nikkei went on a 60% bull market run. This bond issue was also managed by Goldman Sachs, JP Morgan, Nomura, and SMBC Nikko. When this convertible deal was announced, Sony fell to 772 yen per share. Now, it trades closer to 2,000 yen per share.

The Goldman connection

The Sony convertible deal noted above couldn’t have been timed better. Perhaps the inside angle at the time was that Abe would get elected and reflate the economy and cause an equity market rally. That angle sure panned out in spades. As a result of the post-2012 Japan and Sony rally, Third Point owns a lot of Sony. Dan Loeb informed Sony’s CEO, Kazuo Hirai, that he had “exposure” to about 63 million Sony shares in May 2013, when Sony was trading around 1,600 yen per share. That comes to about 6.3% of the company stock. Sony will have to take Third Point seriously. On one hand, it might seem that Goldman Sachs orchestrated the deal, as it profits from both bond arrangement and advisory. However, neither Goldman Sachs nor Japan’s Ministry of Finance felt that Third Point’s initiative to spin off Sony entertainment from its lower-profit core operations was good for shareholders.

To see how Third Point’s Sony investment is supported by trends in Japanese consumer data, please see the next article in this series.

For an overview of the April 1 Bank of Japan Beige Book on Japan’s economic outlook, please see The Bank of Japan Tankan supports a 2014 Japanese equity rally.

Japan’s equity outlook

As 2014 progresses, investors could see a continued outperformance of the Wisdom Tree Japan Hedged (DXJ) and the iShares MSCI Japan ETF (EWJ) versus China’s iShares FTSE China 25 Index Fund (FXI) and Korea’s iShares MSCI South Korea Capped Index Fund (EWY). Plus, as Japan pursues unprecedented monetary expansion and the U.S. Fed tapers its bond purchases, Japanese equities could also outperform broad U.S. equity indices, as reflected in the State Street Global Advisors S&P 500 SPDR (SPY), the State Street Global Advisors Dow Jones Index SPDR (DIA), and the Blackrock iShares S&P 500 Index (IVV).

Continue to Part 2

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