Sony spin-off plan off agenda but looms over shareholder meet

Third Point’s efforts to restructure Sony likely to be ignored at annual meeting

PUBLISHED : Thursday, 20 June, 2013, 8:45am
UPDATED : Thursday, 20 June, 2013, 8:45am

A proposal by Sony’s top investor to partially spin off the Japanese company’s lucrative entertainment business will be the elephant in the room at an annual shareholders meeting on Thursday.

Daniel Loeb, who heads New York-based hedge fund Third Point, will miss the gathering and those attending will not consider his suggestion, sources familiar with the matter said.

They gave no reason why Loeb would not attend. But he is expected to keep pressing his case with Sony’s board and, if no action is taken, will have the right as a major shareholder to eventually call an extraordinary shareholders’ meeting.

Loeb wants Sony to spin off as much as one-fifth of the electronics empire’s profitable entertainment unit and use the proceeds to strengthen its struggling hardware division.

His suggestion, likely to stay on the radar for months, strikes at the heart of whether Sony remains both a consumer electronics maker and a provider of music, movies and TV programmes.

Sony’s strategy to merge content and hardware in a unified company, which kicked off 24 years ago with the purchase of Columbia Pictures, has failed to deliver the synergies it promised, Loeb argued this week in his second letter addressed to Sony CEO Kazuo Hirai.

Loeb’s call to awaken Sony’s “sleeping giant” - an entertainment business that generates 37 per cent of its operating profit with popular artists such as Beyonce and hit franchises like “Spider Man” - may be compelling for shareholders but the company board is unlikely to reach a decision quickly, analysts have said.

With his proposal, Loeb is trying to repeat his success last year at Yahoo Inc, which he took on in a lengthy and eventually bitter proxy fight that triggered a boardroom shakeout.

Tokyo-based Sony, with a market capitalisation of US$21 billion, has long been a pillar of Japan and a pioneer in the electronics industry. But it has lost market share - and its innovative edge - to aggressive rivals such as South Korea’s Samsung Electronics and Apple as they churn out blockbuster products.

Highlighting the challenge to reviving consumer electronics as a profit centre, Sony in May scaled down its sales targets for digital cameras and PCs for the year to end-March 2015 and chopped the operating profit margin goal for the PlayStation game business for that year to 2 per cent from 8 per cent.

“Fundamentally, the problem is what to do with the electronics division,” said Mitsushige Akino, chief fund manager for Ichiyoshi Investment Management in Tokyo.

“If they don’t strengthen that, there’s no point. So the hedge fund’s suggestion is one way to do that.”

Adding pressure on Sony to consider his proposals, Loeb’s US$13 billion fund said this week it increased its stake in Sony to 70 million shares, or about 7 per cent.

With Third Point’s suggestions off the agenda for Thursday’s meeting, shareholders instead will be considering relatively non-controversial management changes including former Sony chief executive Howard Stringer’s retirement from the largely ceremonial post of chairman of the board.

Annual shareholders’ meetings in Japan are typically dominated by questions from individual investors, often airing grievances about company management but rarely leading to changes in management policy or strategy.

It is still unclear how much support Loeb’s plan might win among major Sony shareholders. So far, none has come out either in favour or opposed.

Sony shares are up more than 7 per cent since Loeb sent his first letter to Hirai with his proposals on May 14. They surged to a two-year high of 2,300 yen in the week that followed the proposals, boosted by a media report that said Sony was considering them.