Loeb Exit Leaves Sony’s Hirai With Bigger Challenges

Activist investor Daniel Loeb’s sale of his Sony Corp. stake removes an annoyance for Chief Executive Officer Kazuo Hirai. The bigger challenges aren’t going away.

Two years into a turnaround effort at the Japanese electronics maker, Hirai is struggling to show progress. While Loeb’s Third Point LLC, which held swaps and convertible bonds, said it earned 20 percent on its $1.1 billion investment since May 2013, the common shares are little changed. Last month, Tokyo-based Sony canceled its dividend and forecast a 230 billion yen ($2.1 billion) annual loss.

Loeb’s departure follows setbacks at Sony that include a 180 billion yen writedown of the smartphone business and flagging demand for compact cameras. While Hirai gets credit for cutting costs, increasing transparency for investors and moving away from the personal computers, he hasn’t done enough, according to Loeb, who called unsuccessfully for the company to sell as much as 20 percent of its entertainment unit.

“They have a long way to go and we continue to believe that more urgency will be necessary to definitively turn around the company’s fortune,” Loeb said in a letter to investors yesterday explaining why he sold.

The company’s forecast, for a sixth loss in the last seven years, shows recovery remains a distant goal.

Charles Sipkins, a spokesman for Sony in the U.S., and Mami Imada, a Tokyo-based spokeswoman, both declined to comment, citing company policy about speaking on investor holdings.

Profit Outlook

Shares of Sony rose 3.4 percent to 1,909 yen at the close of trade in Tokyo. The stock has gained 4.6 percent this year compared with a 5.1 percent drop in the benchmark Topix index.

Some of Hirai’s reforms have yet to take hold. Sony is splitting the TV-manufacturing business, a perennial money-loser, into a separate operating unit. The CEO has said Sony isn’t considering a divestiture of that business, while not ruling it out in the future.

The division is focused on so-called 4K ultra high definition sets, and forecasts sales of 16 million liquid-crystal display TVs in the year ending March, compared with 13.5 million sets last year.

“They are doing quite a bit,” said Brian Barish, president of Denver-based Cambiar Investors LLC, which oversees $11.5 billion in assets and bought 10 million Sony ADRs this year. “They had a market share and volume orientation to the hardware business that has finally gone away. And I think you will see the benefit of that in terms of profitability that is higher and more structural once we get into 2015.”

Awaiting Results

Since Loeb’s investment in Sony became public in May 2013, the U.S. stock has declined 7.7 percent, while the Tokyo-traded shares were little changed through yesterday.

The decline in Sony’s core electronics business has accelerated and is pressuring the company’s cash flow, according to Daniel Ernst, an analyst at Hudson Square Research in New York, who has a hold rating on the stock. Standard & Poor’s said last month it may cut the debt rating to junk.

“Strategically they are doing the right things, but that has not borne itself out in the results,” Ernst said in an interview. “We still think Sony should consider spinning out a partial stake in entertainment.”

A partial sale of the entertainment business, an idea first raised by Loeb, would give the company additional cash resources while it tries to right those flagging divisions, Ernst said.

‘Less Pressure’

Loeb had sought a public sale of as much as a 20 percent stake of the entertainment unit, which includes the Culver City, California-based film and TV studio and Sony’s music businesses.

“There will be less pressure on management with activist fund Third Point selling its Sony shares and having less influence on the company,” said Naoki Fujiwara, Tokyo-based chief fund manager at Shinkin Asset Management Co., which holds Sony shares. “However, I think the general strategy of Sony won’t change with or without Third Point’s suggestions.”

In the letter yesterday, Loeb credited Hirai with cutting costs in those businesses, personnel changes and improving the dialog with investors.

“While, regrettably, the company rejected our partial spin-out suggestion, they made some changes that were consistent with our goals,” Loeb said.

Sony may cut its annual sales target for smartphones for the second time this year, a person familiar with the matter said today. The revision may be announced when Sony releases second-quarter earnings on Oct. 31, the person said, asking not to be identified because the information is private.

Movie Rebound

Games and entertainment are two bright spots.

Sony’s PlayStation 4 has emerged as the leader in the newest generation of video-game players. In the quarter ended June 30, sales in the division almost doubled to 257.5 billion yen, while the company recorded a profit of 4.3 billion yen, compared with a year-earlier loss.

Sony Pictures Entertainment registered a 23 percent jump in sales to 194.8 billion yen and profit more than doubled as the studio benefited from “The Amazing Spider-Man 2” and “22 Jump Street.”

Barish said Hirai’s reforms in the electronics business reduce the need for a breakup.

“They have greatly reduced the cost profile and volume expectations for the two problem children in electronics, the TV and handset businesses, and have fully exited the PC business,” he said. “There are a lot of ways this stock can/should work, not just from a breakup perspective.”

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