Sony Corp. (6758) rejected billionaire Daniel Loeb’s call to sell a portion of its entertainment business, saying 100 percent ownership of the film and music units is crucial to the company’s success.
The board decision was unanimous, Tokyo-based Sony said today in an e-mailed statement. The company will begin providing additional disclosure about the entertainment business starting with the current second quarter. Loeb’s Third Point LLC hedge fund said it was “disappointed” with Sony’s decision and intended to “explore further options to create value for Sony shareholders.”
Chief Executive Officer Kazuo Hirai is backing a unified business that spans the production of TVs and mobile devices that can combine with music and film content to drive earnings after years of losses from electronics. Third Point built a 6.9 percent stake in Sony and pushed the board to sell as as much as 20 percent of its entertainment assets in an initial public offering.
“In the last 15-20 years that they’ve owned those businesses, they’ve yet to show any meaningful synergy with electronics,” said Daniel Ernst, an analyst at Hudson Square Research in New York, who has a buy rating on the shares. “The beauty of the entertainment spin plan was that it wouldn’t stop them from keeping trying.”
Third Point said Sony management should communicate more specific plans for improving the results of its entertainment units.
“Sony has clearly recognized the performance issues we identified,” New York-based Third Point said in the e-mailed statement. “A renewed focus on profitability and better margins should reduce bureaucracy and thus free up resources.”
Sony fell 5.4 percent to 2,021 yen as of 2:07 p.m. in Tokyo, the biggest drop since May 27. The stock has more than doubled this year on optimism that Hirai can turn around the company’s struggling electronics business.
Sony’s financial advisers met with Third Point within the past month and studied at least 30 cases of initial public offerings that began as partial spinoffs and wound up either fully separate or being bought back, according to two people familiar with the matter.
One of the examples 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 the statement. “I am firmly committed to assuring their growth, to improving their profitability, and to aggressively leveraging their collaboration with our electronics and service businesses.”
The new disclosures will include quarterly revenue figures for unspecified categories within the movie and music units and other metrics that would help investors calculate adjusted earnings before items, Hirai said.
Loeb said in May that an IPO of entertainment would improve the performance of Sony’s film studios and raise cash to revive electronics.
“President Hirai has been emphasizing his ‘One Sony’ policy and saying the company’s entertainment operation and electronics operation cannot be separated,” said Koki Shiraishi, a Tokyo-based analyst at SMBC Nikko Securities Inc. “So I think this investor proposal issue is mostly over with Sony’s response today.”
Sony last week raised its full-year sales forecast as a weaker yen boosts the value of exports as the company gets almost 70 percent of revenue from overseas. 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)
In U.S. dollar terms, sales for Sony’s pictures unit fell 16 percent in the June quarter. After topping the U.S. box-office last year, Sony’s films have fallen to sixth in 2013 after flops “White House Down” and “After Earth,” starring Will Smith.
The box-office duds prompted Loeb to devote more than half of Third Point’s quarterly investor newsletter to Sony, as he slammed the flops and “high salaries for underperforming senior executives.” He said Sony’s entertainment profit margins lag behind peers, and the unit needs closer supervision amid a lack of franchises and bloated costs.
A combined entertainment unit, including music and pictures, 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.
Hirai cited growth in Sony’s Xperia smartphones in his letter to Loeb as the company posted a June quarter profit in the business after losing money a year earlier.
Smartphone shipments in the quarter rose to 9.6 million from 7.4 million a year earlier. Sony expects to sell 42 million smartphones this year.
Hirai is preparing to release the PlayStation 4 console this year to drive game earnings as consumers migrate to playing games on mobile devices from Samsung and Apple Inc.
Loeb praised Sony’s rollout of the PS4, which is due to be released for the Christmas shopping season starting at $399.
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