Third Point LLC, the hedge fund led by billionaire Daniel Loeb, increased its stake in Sony Corp. while pushing for talks with the board on a proposed initial public offering of the company’s entertainment business.
Funds controlled by Third Point own 70 million shares through direct ownership and cash-settled swaps, according to a June 17 letter from the investor to Sony Chief Executive Officer Kazuo Hirai obtained by Bloomberg News. That equals about 6.9 percent of the Tokyo-based company’s shares on issue.
Directors of Sony, which holds its annual shareholder meeting June 20, are discussing Third Point’s proposal to spin off as much as 20 percent of its music and movie assets so the company can focus on reviving consumer electronics earnings. Loeb, whose fund increased its stake by 9.4 percent, said the company is regaining its edge with the new PlayStation 4 game console and Xperia smartphones.
“It’s positive for Sony; Loeb is acknowledging Sony’s potential,” said Mitsushige Akino, chief fund manager at Ichiyoshi Asset Management Co. in Tokyo. “It would be good for shareholders if Sony spins off its entertainment unit as it would boost its value.”
The new holding compares with the 64 million shares Third Point said it had “exposure to” in a May 14 letter.
Mami Imada, a Tokyo-based spokeswoman for Sony, said the company received the letter and is considering the proposal. Elissa Doyle, a spokeswoman for New York-based Third Point, declined to comment. Jim Kennedy, a U.S.-based spokesman for Sony Entertainment, said he had no immediate comment.
Sony shares rose 4.4 percent 2,036 yen in Tokyo trading, while the Topix index rose 0.2 percent. The stock has more than doubled this year and gained 8.5 percent since Third Point’s first letter.
“This shows Third Point is serious,” said Yasuo Nakane, an analyst at Deutsche Bank AG in Tokyo. “The suggestion itself is reasonable. Becoming a listed company will improve disclosure of the entertainment business and add pressure to management.”
Loeb said a spinoff of the entertainment assets should include a “semi-independent governance structure” with Hirai serving as chairman of both companies. By creating an independent entertainment board, managers would be more accountable and would help in setting growth targets and making decisions on allocating capital, Loeb said in the letter.
The hedge-fund manager said a lack of capital had forced the company to resort to joint ventures and “costly loans” in music publishing, such as its purchase of EMI Group assets.
A Sony-led group, including billionaire David Geffen, agreed in November 2011 to pay $2.2 billion for EMI’s publishing unit from Citigroup Inc.
“It seems difficult to argue that entertainment would not be strengthened by the transparency that comes with public reporting,” Loeb wrote in the letter.
Sony’s share of Japan’s smartphone market rose to a three-year high this month, widening its lead over Apple Inc., as new Xperia models and a discount program from the nation’s largest wireless carrier helped stoke sales.
The company unveiled its new PS4 this month, with orders for the new console running ahead of internal projections, Andrew House, president and group chief executive officer of Sony Computer Entertainment, said last week in an interview.
In a face-off between Microsoft Corp.’s Xbox One and the PlayStation at the annual E3 video-game conference in Los Angeles, Sony won the first round by pricing its machine $100 below Microsoft’s and offering more flexibility about how to play, trade and sell games.
The new machines face a difficult market. U.S. retail sales of video-game hardware, software and accessories fell 25 percent to $386.3 million last month as consumers shifted to digital titles played on mobile devices and awaited next-generation consoles, Port Washington, New York-based NPD Group Inc. said in e-mail yesterday.
“Sony appears to be regaining its competitive edge,” Loeb said in the letter. “Given our large stake, we reiterate our offer to serve on Sony’s board of directors.”
Sony last month forecast a 16 percent increase in profit for the year started April 1 following job cuts, asset sales, a weaker yen and blockbuster movies including “Skyfall” and “The Amazing Spider-Man.” Sony Pictures Entertainment this week announced dates for the third and fourth installments of the rebooted “Spider-Man” franchise.
The company reiterated its target for the TV operation to post a profit this year after racking up 800 billion yen ($8.4 billion) in losses since 2004 and seeing its global share of revenue from flat-panel TVs fall to fifth from third in the quarter ending March 31, according to researcher DisplaySearch.
The company accounted for 5.1 percent of sales in the period, compared with 6.6 percent in the three months ended December, it said.
Apple signed an agreement with Sony’s music business this month to enable the iPhone maker to start its online radio service, said people with knowledge of the situation. The Japanese company’s artists include Alicia Keys.
Sony is working with Morgan Stanley and Citigroup as it considers the Loeb plan, people familiar with the matter said last month.
“It’s unlikely the proposed plan for an entertainment IPO will move forward swiftly,” said Keita Wakabayashi, an analyst at Mito Securities Co. in Tokyo. “Sony has said its stance is not to sell it. Still, you can’t rule out other possibilities, especially that the company’s board will be renewed.”
Shareholders at the June 20 meeting will vote on Sony’s nomination of three new board directors, including two former Apple executives, to replace four that will retire.
The electronics and entertainment businesses should be managed together because that would allow the company to coordinate the release of ultra-high resolution TVs with compatible movies, Hirai said in an interview with the Nikkei newspaper published June 14. Hirai promised to increase sales 5 percent to 10 percent a year by expanding TV programming, cable channels and “other platforms.”
“The entertainment arm is one of our three core pillars, along with electronics and the financial arm, so the hardware and software businesses are managed in an integrated manner,” Hirai told Nikkei.