Loeb’s Plan Spotlights Sony Missing Media RenaissanceCliff Edwards and Michael White
Billionaire investor Daniel Loeb’s proposal to separate Sony Corp.’s movie, music and TV businesses would give the Tokyo-based company a chance to join the 3 1/2-year media rally it has missed.
Loeb, founder of Third Point LLC, yesterday recommended selling as much as 20 percent of Sony’s entertainment unit in an initial public offering that would free it from the struggling electronics business. As an independent company, the maker of “Spider-Man” movies would benefit from more disciplined management, investor attention and fatter profits, giving a $6.1 billion lift to Sony’s market value, he wrote in a letter to Chief Executive Officer Kazuo Hirai.
The move from Sony’s largest shareholder comes as media stocks surge to all-time highs amid growing optimism that makers of films and television shows will weather a decline in home-video sales by signing online outfits like Netflix Inc. and Amazon.com Inc. as distributors. With Sony the top-grossing U.S. film studio last year with year with $4.4 billion in worldwide ticket sales, the spinoff could boost the value of its entertainment unit as much as 50 percent, according to Paul Sweeney, a senior analyst at Bloomberg Industries.
“Media stocks have been ripping over the past three-and-a-half years,” said Sweeney, who estimates Sony’s entertainment units, valued at an implied $8 billion, could fetch as much as $12 billion. “Investors have a hard time valuing those businesses within the greater Sony conglomerate.”
Media stocks including Walt Disney Co., Lions Gate Entertainment Corp. and CBS Corp. are at or near all-time highs. Since January 2010, the S&P 500 Media Index has more than doubled, while Sony, with one of the world’s largest collections of movie, television and music businesses, has declined 28 percent.
Sony’s entertainment unit is valued at about 8 times earnings before interest, taxes, depreciation and amortization, below the 10-11 times Ebitda at large media companies including Disney, News Corp., CBS, Viacom Inc. and Time Warner Inc., based on data compiled by Bloomberg, Sweeney said.
Sony’s entertainment profit by that measure could surge by as much as 50 percent, Loeb wrote. With improvements in the electronics business and elsewhere, he projected the shares could increase as much as 60 percent.
The company’s American Depositary shares slipped 1.5 percent to $20.45 at the close in New York, for a market value of about $20.7 billion. The stock surged 10 percent to 2,072 yen today in Tokyo, the most since March 13, extending its gain this year to 116 percent.
Other analysts see even more potential, given the rebound in the music industry as digital revenue rises. Laura Martin with Needham & Co. in San Marino, California, estimates the entertainment unit is worth $10 billion to $15 billion, split evenly between the film and TV businesses and music. Those include the Sony Music record label and Sony/ATV Music Publishing, its joint venture with Michael Jackson’s estate.
“We believe that music has bottomed and that global growth will occur for each of the next five years, off its new lower base, implying that now is a great time to buy into the music business,” Martin said.
Loeb has invested $1.1 billion in Sony, he said in his letter, and is willing to bet more. He said he would underwrite a rights offering in the entertainment unit that would give shareholders the opportunity to participate. Third Point, which manages $13 billion, would “backstop” the initial public offering up to $2 billion, meaning Loeb would soak up any entertainment stock others don’t want.
“Unfortunately, the financial analyst community that follows Sony focuses almost exclusively on the opportunities and challenges Sony faces in its electronics businesses, ignoring the value of Sony Entertainment,” Loeb wrote. “Our plan shifts that paradigm.”
The entertainment unit isn’t for sale, Sony said yesterday in a statement.
While potential buyers such as CBS would covet Sony Entertainment should it become available, the parent has reasons to keep its content and hardware units together, according to Daniel Ernst, an analyst with Hudson Square Research in New York.
“The problem with selling Sony Pictures outright is they would lose access to the positive ongoing earnings of the group,” Ernst said.
Dana McClintock, a CBS spokesman, declined to comment.
Sony uses a range of Web-connected devices, including its PlayStation gaming consoles, Bravia TV sets and Blu-ray players, to offer a mix of video, music and games. Hirai has said such content, some of which is proprietary, is the key to turning around the consumer electronics business.
Owning a major Hollywood studio also gives Sony a say in film industry technology development. Sony bought Columbia Pictures from Coca-Cola Co. in 1989 after Sony’s Betamax home-video player was rejected in favor of JVC’s VHS system.
Sony benefited from its studio ownership when the Blu-ray disk format it backed for high-definition home movies was chosen over Toshiba Corp.’s HD-DVD in 2008, said John Burke, an entertainment attorney at Akin Gump Strauss Hauer & Feld LP in Los Angeles.
The victory helped sell Sony players and brought in Blu-ray licensing fees from other manufacturers.
Losing Betamax “was a huge deal and they decided they needed a toehold in the software business to drive decisions,” Burke said. “I would be very surprised if they were willing to sell Sony Pictures.”