Sony Corporation (ADR) (SNE) Might Be A Good Buy, Right?

Famous hedge fund manager Dan Loeb has come to Japan, targeting one of the biggest Japanese corporations, Sony Corporation (ADR) (NYSE:SNE). Dan Loeb revealed that his firm, Third Point LLC, with 64 million shares, including both direct share ownership and cash-settled swaps, was the largest owner of Sony. Dan Loeb has laid out several steps to unlock the hidden shareholder value, believing that the company has as much as a 60% potential upside.

Sony Corporation (ADR) (NYSE:SNE)

Two steps to unlock Sony’s value

In the recent letter to Mr. Kazuo Hirai, the President and CEO of Sony, Dan Loeb mentioned that Sony Corporation (ADR) (NYSE:SNE) could maximize the company’s shareholder value by two steps: first was to take a part of Sony Entertainment listed, and the second was to focus on industry-leading businesses for the future growth of Sony Electronics.

Indeed, Sony’s business was divided into several segments including Consumer Products & Services, Professional, Device & Solutions, Pictures, Music, Financial Services and Sony Mobile. While the two biggest revenue contributors were the Consumer Products & Services segment and the Professional, Device & Solutions segment, those two segments generated operating losses in 2012. The Financial Services segment was actually the most profitable segment, with ¥131 ($1.31) billion in operating income in 2012. The Pictures, Music and Sony Mobile have also generated consistent positive operating income, with The Pictures, Music and Sony Mobile have also generated consistent positive operating income of ¥34.1 billion ($341 million), ¥36.9 billion ($369 million) and ¥31.7 billion ($317 million), respectively.

Dan Loeb stated that Sony Corporation (ADR) (NYSE:SNE) should take around a 15% to 20% stake in Sony Entertainment public so that the public could realize its high profitability with the great asset in television and motion picture production. Moreover, its management could have an incentive to grow the business they control. Sony was advised not to have a standard IPO, dividend or spinoff but rather a subscription right to current shareholders, to ensure the economic interests of Sony’s current shareholders. Third Point was ready to “backstop” the IPO up to $1.5 to $2 billion. According to Dan Loeb, if Sony Entertainment could have the similar margin to its U.S. peers, its EBITDA might rise up to 50%. With a EBITDA multiple of 9, Sony Corporation (ADR) (NYSE:SNE) might realize an additional market valuation of ¥625 ($6.25) billion, or ¥540 per share, or 25% of the current trading price.

Sony Electronics and its Japanese peers

Its other business, Sony Electronics, has been producing sluggish returns and losses in the past ten years. However, the company was still undervalued on the market.