Daniel Loeb, the billionaire investor pushing Sony Corp. (6758) to sell part of its entertainment units, devoted more than half of his quarterly letter to praising an electronics turnaround and slamming movie flops.
Sony Chief Executive Officer Kazuo Hirai “deserves plaudits for the green shoots increasingly visible in electronics,” Loeb’s Third Point LLC said, citing momentum in smartphones. At the same time, it pointed to blunders at a “poorly managed” film unit with “high salaries for underperforming senior executives.”
Loeb’s latest salvo, which names executives he considers to be at fault, comes two months after he broached the idea that Sony should take part of its entertainment business public to raise money for its electronics divisions. Analysts said the Aug. 1 earnings report will probably show Sony’s first-quarter profit evaporated as U.S. ticket sales of “White House Down” and “After Earth” recouped less than half of production costs totaling $280 million.
“The tone has gotten more shrill,” Koki Shiraishi, a Tokyo-based analyst at SMBC Nikko Securities Inc. said yesterday. “He’s stepping up pressure because he hasn’t gotten what he wants.”
Third Point was kinder this week toward Sony’s effort to revive its hardware division than in a May 14 letter that cited “persistent losses” in electronics.
The strong momentum in introducing the Xperia line of smartphones had been accompanied by a perfectly executed introduction of the PlayStation 4 gaming console, according to the letter. The game and mobile-products divisions may contribute profit,’’ while televisions exert less of a drag on earnings, Third Point said.
“Visible improvement in Sony’s new products has caused us to rethink our approach to valuing electronics,” Third Point said. “The game and mobile products divisions are now poised to join the devices business as meaningful profit contributors.”
Sony probably broke even last quarter after posting a 93.9 billion yen ($957 million) profit in the March quarter, according to the average estimate of three analysts surveyed by Bloomberg News.
Net income is projected to total 55.3 billion yen for the 12 months ending March 2014, according to the average of 17 analyst estimates compiled by Bloomberg. That’s in line with the company’s May projection of 50 billion yen.
While Hirai has stressed the importance of ties between electronics and the entertainment business, Sony’s board has agreed to consider Loeb’s proposal to sell part of the entertainment unit in an IPO.
“Sony is focused on creating shareholder value by executing on our plan to revitalize and grow the electronics business, while further strengthening the entertainment and financial services businesses, which generate stable profit,” Jim Kennedy, a New York-based spokesman for Sony, said in an e-mailed statement.
Third Point, based in New York, said in May that it held a Sony stake valued at $1.1 billion, and since then it has been pushing Loeb’s plan. An independent board and shareholders would lead to more disciplined and accountable management at Sony’s Culver City, California-based movie and television studio, Loeb has said.
Third Point owned 70 million shares through direct ownership and cash-settled swaps as of mid-June, and is interested in representation on Sony’s board, it said in a June 17 letter to Hirai. The holding represents about 6.9 percent of outstanding shares, up from 64 million shares in May.
Sony climbed 2.9 percent to 2,117 yen at the close in Tokyo trading yesterday. The stock has more than doubled this year.
Still, Loeb was more critical when it came to the failings of Sony’s film unit, comparing recent summer offerings to ‘Waterworld’’ and “Ishtar,” two epic Hollywood busts. Third Point called out Sony Pictures Entertainment’s top executives Michael Lynton and Amy Pascal as responsible for the “debacle.”
“We find it perplexing that Mr. Hirai does not worry about a division that has just released 2013’s versions of Waterworld and Ishtar back-to-back,” it said. “These latest blunders are prima facie evidence of our thesis that Entertainment’s U.S.- based business is being ineffectively overseen.”
After topping U.S. movie sales last year, Sony has fallen to sixth this year, according to researcher Box Office Mojo.
“White House Down,” an action movie with Channing Tatum and Jamie Foxx, was made for $150 million and garnered $70.7 million in U.S. ticket sales, according to Box Office Mojo. “After Earth,” with a production budget of $130 million, has generated $60 million in U.S. sales. Production budgets don’t include spending on marketing. Studios typically split box-office receipts with theaters.
“Unlike electronics, entertainment remains poorly managed, with a famously bloated corporate structure,” according to the letter. The business also had “marketing budgets that do not seem to be in line with any sense of return on capital invested,” Third Point said.