Dan Loeb, the founder and CEO of Third Point LLC, has delivered great returns for his investors. Since Third Point Offshore Fund’s inception in 1996, Third Point has managed to produce a 17.8% annualized return, handily beating the S&P 500’s annualized gain of only 6.6%. The fund follows an opportunistic approach, seeking “attractive event-driven equity and credit opportunities and occasional “macro” trades.” Recently, Dan Loeb has concentrated his bet on the activism of Sony Corporation (ADR) (NYSE:SNE).
Separating Electronics and Entertainment business
Dan Loeb believed that Sony Corporation (ADR) (NYSE:SNE) was quite undervalued, as the general investment community did not recognize the real value in the sum-of-the-parts valuation of the company’s three businesses: Electronics, Finance and Entertainment. The Electronics business has been struggling with the television and VAIO computers, but Dan Loeb saw its real value in the semiconductor and video game console divisions, and the revival of the smartphone segment.
Many investors might not realize the company’s profitable Entertainment business, with leading franchises in movie and television production. Dan Loeb mentioned that by the time he invested in Sony Corporation (ADR) (NYSE:SNE), he could acquire Entertainment for a bargain price while having Electronics business for free.
Moreover, along with the advantages of Japanese macro structural reform, Sony has also taken steps to cut overhead costs and reduce the number of products. The Electronics business has moved forward significantly with Sony’s Xperia Z smartphone and other new Xperia models. Interestingly, Sony Corporation (ADR) (NYSE:SNE) has gained the number one position in the smartphone market in China and has become the third largest smartphone player in Europe.
However, despite the improving Electronics segment, the profitable Entertainment business was “poorly managed” with “generous perk packages, high salaries for underperforming executives” and uneconomical marketing budgets. Dan Loeb pointed out in his letter that the Entertainment business’ trailing EBITDA was 700 basis points below its peers in the Pictures division and 380 basis points lower in the Music division. Dan Loeb thought that if Sony’s Entertainment business has the same margins with its peers, its EBITDA could grow by $800 billion to more than $2 billion.
Dan Loeb has proposed two steps to unlock Sony Corporation (ADR) (NYSE:SNE)’s shareholder potential values. First, was to list Sony Entertainment publicly, so that the high profitability in Sony Entertainment could be realized by the general market. Second, was to focus on industry-leading businesses for the future growth of Sony Electronics. He thought that the public listing of the Entertainment business would offer the company direct exposure to high-value international cable networks, huge room for margin improvement, unlocking hidden asset value and capital return.
Sony has the lowest price-to-book valuation compared to its peers
Sony Corporation (ADR) (NYSE:SNE) is trading at $21.20 per share, with the total market cap of around $21.4 billion. The market values Sony at 7.75 times its trailing EBITDA and only 0.78 times its book value. Compared to its peers including Sharp and Panasonic, Sony has the lowest price-to-book among the three.