Shares of Sony (NYSE:SNE) surged 14% Tuesday morning after hedge-fund giant Daniel Loeb revealed taking a $1.1 billion stake and called on the Japanese conglomerate to spin off its entertainment business to breathe new life into its electronics division.
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While investors applauded the proposal and news of Loeb taking a massive stake in Sony, the Tokyo-based company reiterated that its entertainment businesses are “not for sale” and said it plans to stick to its own strategy.
In a letter to Sony CEO Kazuo Hirai, Loeb’s Third Point urged management to take public a 15% to 20% stake in Sony Entertainment, “allowing it to thrive independently with the support” of the parent company while “increasing capital to revitalize Sony Electronics.”
Third Point, which said it is now the largest Sony shareholder, said it believes Sony Electronics assets comprise over 40% of Sony’s enterprise value. However, the hedge fund said the division’s profit margins “fall short” against its U.S.-listed peers.
“We believe the underperformance would be remedied by a more disciplined management approach,” Loeb wrote.
He said an initial public offering of a minority stake could be used to “reward management through the growth of an equity security specifically tied to a company they achieve.”
If Sony achieved peer group margins, its EBITDA would soar as much as 50%, contributing to an incremental 625 billion yen boost in market valuation, Loeb projected.
Instead of a traditional public offering, spinoff or dividend, Loeb said Sony should offer subscription rights to current shareholders to ensure their “economic interests are protected.”
Third Point said it is prepared to “backstop” the IPO up to $1.5 billion to $2 billion without requesting fees for the financial guarantee.
However, a Sony spokesperson said that while it “welcomes investment in the company,” it is “focused on creating shareholder value by executing on our plan to revitalize and grow the electronics business, while further strengthening the stable business foundations of the entertainment and financial service businesses.”
Sony also said “the entertainment businesses are important contributors to Sony’s growth and are not for sale.” The spokesperson added: “We look forward to continuing a constructive dialogue with our shareholders as we pursue our strategy.”
In addition to proposing the IPO of part of the electronics business, Third Point argued that Sony Electronics “is a considerable and underappreciated value.”
“Third Point would not have made this substantial investment if we did not believe in a bright future for Sony’s global brand, superior technology, and dedicated employees,” Loeb said.
Third Point also said it would “gladly accept” a seat on Sony’s board of directors.
U.S.-listed shares of Sony soared 9.42% to $20.67 Tuesday morning, boosting their 2013 surge to almost 85%. Earlier in the session Sony hit a new 52-week high of $22.23.