Sony Corp. (6758), which meets with investors this week about improving the company’s entertainment unit performance, has hired Bain & Co. to identify $100 million in cuts, a person familiar with the situation said yesterday.
Sony Chief Executive Officer Kazuo Hirai is hosting a conference on Nov. 21 at the company’s studios in Culver City, California, to discuss his strategy for entertainment. The cuts will include job losses, said the person, who asked not to be identified because the moves haven’t been announced publicly. Sony shares rose.
Hirai is seeking to lower costs after reporting a second-quarter loss that led Moody’s Investors Service to warn Sony’s debt rating could be cut to junk. The Tokyo-based company has faced criticism over the profitability of its entertainment division, with billionaire Daniel Loeb of Third Point LLC calling for a partial sale of the business.
“The effect of Daniel Loeb is generating results,” said Mitsushige Akino, chief fund manager at Ichiyoshi Asset Management Co. in Tokyo. “However, entertainment is a growing area for Sony, and improving the business cannot be all about just cutting costs.”
Cheryl Krauss, a spokeswoman for Bain in New York, didn’t immediately return a call seeking comment.
The cuts are part of a nearly four-year process of increasing fiscal discipline, Charles Sipkins, a spokesman for Sony Pictures, said yesterday in an e-mailed statement. The entertainment division is conducting a review of its business to identify further efficiencies, according to the e-mail.
Sony rose 1.3 percent to 1,886 yen in Tokyo trading, extending its gain to 97 percent this year.
At the conference this week, Hirai, 52, will seek to convince investors that owning content gives Sony a competitive advantage even as investors including Third Point, which holds a 6.5 percent stake in the company, have argued the division would be more valuable as a separate business.
“The hope and dream is that they might unlock the value of that business,” Daniel Ernst, an analyst at Hudson Square Research in New York, said in an interview. “Big conglomerates don’t get full value.”
Sony’s film studios, which include Columbia Pictures and Screen Gems, regularly vie with Time Warner Inc.’s Warner Bros. as the biggest movie distributor. Sony Pictures Television produces the shows “Breaking Bad” and “Masters of Sex,” and owns 65 TV channels worldwide. The company also owns the second-biggest music company after Vivendi SA’s Universal Music Group.
After box-office flops “After Earth” and “White House Down,” the film studio is reviewing changes to how movies are selected, Loeb said last week at an investor conference in New York sponsored by The New York Times.
Sony ranks fourth in domestic box-office sales this year, with revenue of $1.13 billion, according to Box Office Mojo, an industry researcher. That’s down 32 percent from $1.65 billion at this time a year earlier.
The company also hopes to use its new PlayStation 4 console as the centerpiece of its plan to deliver its own content to consumers’ living rooms. Sony sold more than 1 million consoles in North America during the first 24 hours of sales beginning Nov. 15, topping initial results for the predecessor device in 2006.
Starting with the second quarter, Sony began disclosing more details about the entertainment division, which produced an operating loss of $179 million on $1.8 billion in sales. Investors are pushing for even more granular details, including profit margins at each of the entertainment unit’s operations, Ernst said.
“Entertainment is a growing area for Sony, and improving the business cannot be all about just cutting costs,” Akino said. “Sony should do both cost-cutting and pursue growth measures.”
The New York Times reported the cost-cutting plans earlier yesterday.
In a May 14 letter, Loeb began agitating for Hirai and Sony’s board to split off the entertainment business. In response, Sony’s board in August pledged to provide more financial detail on its entertainment business, while declining to spin off the operation.
A separate Sony entertainment company would be more highly valued, just as Sony’s financial-services division was given more value once it was separately traded, Ernst said.
While profit margins on films and music are small, clarity on Sony Pictures Television could be a catalyst for the stock, Ernst said.
The division’s 65 cable, on-demand and Internet channels worldwide are undervalued, Ernst said, compared with AMC Networks Inc.’s $1.04 billion acquisition of Liberty Global Plc’s Chellomedia, which reaches 390 million households in 138 countries. Sony’s networks are in 484.1 million pay-TV homes in India and 84.2 million households in Latin America.
“Owning channels abroad has been a big area for growth for media companies,” Ernst said. “Sony has those, too, but it’s unclear if the earnings are to the same extent.”
Sony has few examples of content spurring electronics sales and even fewer of its devices selling films or TV shows, according to Ernst. The company needs to show it can compete against Apple Inc. and Samsung Electronics Co. (005930) in mobile phones and tablets, he said.
“They have been going downhill for a long time,” Edwin Merner, president of Atlantis Investment Research Corp. in Tokyo, said in an interview. “There is no strategy that I can see. It’s not too late but time is running out.”