Sony Corp. (6758)’s rejection of billionaire Daniel Loeb’s push to sell part of its entertainment assets puts more pressure on Chief Executive Officer Kazuo Hirai to revive the company’s sagging film and electronics businesses.
Sony directors turned down a proposal by Loeb’s Third Point LLC hedge fund to sell as much as 20 percent of those assets in an initial public offering. Full ownership of the movie, TV production and music units is integral to Sony’s strategy for revival, the board said in a letter to Loeb. The billionaire said he was “disappointed” with the decision.
Hirai, on the job for 16 months, is pushing his “One Sony” vision to unite mobile devices and TVs with games, music and film content. After posting a profit in smartphones and television sets, Hirai has committed to rejuvenating a film unit that slumped to No. 6 at the U.S. box office this year after being No. 1 last year.
“Now that he has turned down the proposal, the pressure on Hirai will likely increase to boost entertainment earnings,” said Masamitsu Ohki, a fund manager at Stats Investment Management Co. in Tokyo. “Sony’s management will probably add more resources in the entertainment area and may get more outside experts to strengthen the entertainment operation.”
Sony fell 4.3 percent to 1,952 yen in Tokyo trading, the lowest in almost two months, after its American Depositary Receipts fell 4.8 percent to $20.72 yesterday in New York.
Funds controlled by New York-based Third Point built a 6.9 percent stake in Sony and, beginning with a May 14 letter, pushed the board to raise cash through an IPO and then use the money to help “revitalize” its consumer electronics units.
Sony’s financial advisers met with Third Point within the past month and studied at least 30 cases of IPOs that began as partial spinoffs and wound up either fully separate or being bought back, according to two people familiar with the matter.
One example was News Corp.’s spinoff of Fox Entertainment Group, which was bought back about six years later, one of the people said, asking to not be identified because the discussions were private. The advisers also disputed some of Loeb’s comments about the entertainment business, the person said.
“Sony’s entertainment businesses are critical to our corporate strategy and will be important drivers of growth,” Hirai said in a letter to Loeb. “I am firmly committed to assuring their growth, to improving their profitability, and to aggressively leveraging their collaboration with our electronics and service businesses.”
Loeb doesn’t plan a proxy fight and probably won’t exercise his right to call a special meeting, according to a person with knowledge of the situation. Loeb will meet with Hirai in coming months, and Third Point expects significant progress in results by May 2014, said the person, who asked not to be identified because deliberations are private.
In a June 17 letter to Sony, Loeb said he held 70 million shares.
Third Point said Sony management should communicate more specific plans for improving the results of its entertainment units. Box-office duds “White House Down” and “After Earth” prompted Loeb to say in a July 29 newsletter that Sony’s entertainment profit margins lagged behind peers, and the unit needs closer supervision amid a lack of franchises and bloated costs.
Hirai said he is “very focused” on improving profit margins at the movie unit, announcing yesterday that Sony will include quarterly revenue figures for unspecified categories within the film and music units. Under his leadership, the movie-production process is more rigorous, the music catalog is being leveraged for digital services, and executive compensation is tied to the performances of films and music, Hirai said.
“Sony has clearly recognized the performance issues we identified,” Third Point said in an e-mailed statement. “A renewed focus on profitability and better margins should reduce bureaucracy and thus free up resources.”
Hirai, 52, is boosting investment in television production and international TV networks and production. The company produces “Breaking Bad” and “Jeopardy!” while also owning such international channels as AXN and Sony Movie Channel.
Revenue from Sony’s television networks was $1.5 billion in the 12 months ended in March, compared with $600 million five years earlier, Hirai said.
Sony’s margin from motion pictures, which measures operating income as a proportion of sales, was 6.5 percent last fiscal year, according to data compiled by Bloomberg. That compares with more than 15 percent for the filmed entertainment unit of Twenty-First Century Fox Inc. (FOXA) and 12.4 percent for the studio entertainment unit of Walt Disney Co. (DIS)
“Sony needs to prove it can increase enterprise value without an entertainment IPO,” said Yasuo Nakane, a Tokyo-based analyst at Deutsche Bank AG. “Hirai will be under pressure to prove this, and he needs to show it to investors in a relatively short period of time -- maybe a year or so.”
Sales for the Sony Pictures unit fell 16 percent in the June quarter in U.S. dollar terms. “The Smurfs 2,” a $105 million film released last week, earned $27.1 million in the U.S. through Aug. 4, trailing the first movie, according to Box Office Mojo, an industry researcher. “Elysium,” a science-fiction drama starring Matt Damon and Jodie Foster, opens Aug. 9.
A combined entertainment unit, including music and film, would be the second-biggest source of earnings based on the company’s June quarter results. Sony’s largest business by earnings is financial services.
Sony last week raised its full-year sales forecast as a weaker yen boosts the value of exports that account for almost 70 percent of the company’s revenue. The improved outlook came even as it cut expected shipments of TVs, digital cameras and personal computers as it tries to match Samsung Electronics Co. (005930)
Hirai cited growth in Xperia smartphones in his letter to Loeb as the company posted a quarterly profit in the business after losing money a year earlier. Smartphone shipments in the three months ending June rose to 9.6 million from 7.4 million a year earlier.
Sony expects to sell 42 million smartphones this year.
“He’s going for the gold and that doesn’t include folding the house that is Sony Pictures to a guy from Wall Street,” said Richard Doherty, president of technology-consulting firm Envisioneering Group Inc.
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