Sony Shares Sink on Report Board to Reject IPO of Unit

Sony Corp. fell as much as 3.1 percent in Japan trading after Nikkei reported the company is poised to reject billionaire Daniel Loeb’s proposal to sell part of the entertainment unit in an initial public offering.

The company declined to its lowest level in more than a month before trading at 2,036 yen at 10:20 a.m. in Tokyo. Sony’s New York-traded shares earlier retreated to their lowest close in more than a month. At a board meeting yesterday, some Sony directors objected to the plan from Loeb’s Third Point LLC hedge fund to sell part of the business that creates and distributes films, TV shows and music, Nikkei said. A formal rejection is expected soon, the report said.

“The Sony board and management continues to review the Third Point proposal, and we have no comment on this report,” Jim Kennedy, a New York-based spokesman for Sony, said in an e-mail. Mami Imada, a Tokyo-based spokeswoman for the electronics maker, declined to comment. Elissa Doyle, a managing director at Third Point, also declined to comment.

Sony’s shares have more than doubled this year in Tokyo, propelled by investor optimism that Chief Executive Kazuo Hirai is making progress turning around the maker of Xperia phones, PlayStation video-game consoles and Bravia TVs. New York-based Third Point, which disclosed a stake in Sony in May, has been pressuring Hirai to go further by selling as much as 20 percent of the entertainment unit to the public.

Management Critique

Loeb contends an independent board and shareholders will force management of Sony’s film, television and music operations to become more disciplined and responsive to investors. The company reports first-quarter earnings today and is expected to post a profit of 2.6 billion yen ($27 million), according to the median estimate of five analysts surveyed by Bloomberg News.

The activist stepped up his criticism of the entertainment unit’s management in a July 29 quarterly letter to Third Point investors, citing box-office disappointments for big-budget films “After Earth” and “White House Down,” and pointing out that Sony’s entertainment profit margins lag behind peers. He said the unit needs closer supervision amid a lack of franchises and bloated costs, and called on Sony to more fully address entertainment results with investors.

“Given entertainment’s perpetual underperformance, perhaps Sony’s reluctance to discuss it candidly stems from (understandable) embarrassment,” Loeb wrote in the letter.

Entertainment Ties

Sony is working with Morgan Stanley and Citigroup Inc. to evaluate Loeb’s proposal, people familiar with the matter said in May. The company’s advisers made recommendations to the board yesterday, Nikkei reported. While some directors resisted a spinoff, Sony will consider disclosing more information about the entertainment unit, according to the report.

Today’s earnings report will give investors more evidence as to whether Hirai is making headway with the struggling electronics unit he considers the company’s highest priority.

Hirai has stressed the importance of ties between electronics and the entertainment businesses, suggesting Sony movies and music will help sell gear against competitors including Samsung Electronics Co. and low-cost Chinese manufacturers.

Sony’s film and television production arm has grown operating earnings 37 percent over the last five years, compared to little-change profit in total for U.S. film groups, according to Dan Ernst, an analyst with Hudson Square Research in New York, who has a “buy” rating on the shares.

Disney, Viacom

Large media companies with broadcast and cable networks, including Time Warner Inc., Walt Disney Co., Viacom Inc. and 21st Century Fox Inc., have generated higher operating margins as Loeb has suggested, Ernst said in a recent report. However, he said, Sony’s film and TV operating profit is on par with its peers when compared with competitors’ similar segments and adjusting for how film costs are amortized. Sony doesn’t operate a television network.

Third Point said in May that it held a Sony stake valued at $1.1 billion, and since then it has increased its holding. Third Point owned 70 million shares through direct ownership and cash-settled swaps as of mid-June, and is interested in representation on Sony’s board, according to a June 17 letter to Hirai. The holding represents about 6.9 percent of shares outstanding.

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