(Deletes reference to "Iron Man" in paragraph 6)
By Chikafumi Hodo and Nathan Layne
TOKYO May 14 Billionaire hedge fund investor
Daniel Loeb on Tuesday called on Sony Corp to spin off
its lucrative entertainment arm, setting the stage for a clash
between his activist Wall Street fund and management at the
Japanese electronics maker.
Loeb said his Third Point hedge fund had accumulated a
little more than 6 percent of Sony's shares - a stake worth $1.1
billion - making it the largest stakeholder in the inventor of
the Walkman portable music player and Trinitron TV.
In a letter Loeb personally delivered to CEO Kazuo Hirai at
Sony's headquarters, the fund manager said Third Point was
willing to put up another 200 billion yen ($1.97 billion) to
support an initial public offering of up to a fifth of the
entertainment arm, which includes one of Hollywood's top film
studios and a leading music label.
Loeb, 51, is one of the best known figures in the secretive
hedge fund industry with a record of clashing with corporate
executives over strategy, including engineering a successful
boardroom shake-up at Yahoo Inc last year.
In his letter, Loeb endorsed Hirai's attempts to revive
Sony, but said the problems of the company's electronics
business distracted from the value of U.S.-based Sony
Entertainment, an asset he called a "hidden gem".
Loeb said the proposed spin-off of a unit that is home to
artists such as Beyonce and Adele and produced movie franchises
like "Spider-Man" could add another 60 percent to Sony's stock
While Sony has sold off real estate and other assets to
cover losses on consumer electronics, Hirai sees the
entertainment business as core to the company's long-held vision
of marrying content and hardware.
"The entertainment businesses are important contributors to
Sony's growth and are not for sale," Sony said in response to
Loeb's proposal. "We look forward to continuing constructive
dialogue with our shareholders as we pursue our strategy."
Hirai, a 52-year old Sony veteran who started his career in
the music business, is due to give an update on his strategy for
the company at a briefing in Tokyo on May 22.
Sony shares have already doubled this year amid a rally in
Japanese shares as foreign investors bet economic
policies of Prime Minister Shinzo Abe will pull the economy out
of a two-decade slump.
Loeb cited the hopes for economic reforms raised by Abe in
making his case for change at Sony.
"Sony stands at the crossroads of compelling corporate
opportunity and massive Japanese economic reform," Loeb wrote in
the letter, which was made available to media. Corporate leaders
like Hirai, he added, "can spearhead this important growth."
Third Point's flagship fund posted a return of 10.5 percent
for investors in January-April, a time when the rest of the
hedge fund industry lagged with an average return of just under
5 percent. The fund was helped by its positions in Yahoo, a bet
on Greek government bonds and its holdings of Japanese shares.
After taking a stake in Yahoo, Loeb agitated successfully to
oust the CEO and members of the Internet company's board after
charging that directors were living in "an illogical
But Loeb does not have a well-known track record in Japan
where activist investors have had little success, rebuffed by
corporate boards packed with insiders and creditor banks that
tend to side with management in maintaining the status quo.
Investors and analysts have argued for years that Sony could
be worth more in a break up because of a decade-long slump in
its electronics business as it ceded ground to rivals such as
Apple Inc in portable music and Samsung Electronics
in flat panel TVs.
Rather than a traditional IPO, Loeb has proposed selling a
15-20 percent stake in Sony Entertainment through a rights
offering to existing Sony shareholders. The move would allow the
parent company to shift some debt off its balance sheet.
Taking the unit public would provide incentives for its
executives to run the operations more efficiently. Raising its
profit margins to the industry average could in theory add
another 625 billion yen in market value, Loeb said.
Loeb cited Sony Financial, the profitable insurance
arm that was spun-off but is still majority-owned by Sony, as an
example of how the move could be beneficial for the group.
Most importantly, the cash generated could be used to help
streamline the electronics business, which suffers from a lack
of focus even after Hirai took the helm from former CEO Howard
Stringer in 2012, Loeb said.
Hirai's strategy to revive Sony in consumer electronics is
to focus on cameras, PlayStation game consoles and smartphones.
Loeb's proposal could trigger buying of Sony's stock, said
Tetsuro Ii, chief executive of Tokyo-based fund manager Commons
Asset Management. Sony closed Tuesday up 1.2 percent at 1,877
yen, valuing the entire company at $19 billion.
"Be it Sony or Panasonic, at the end of the day
these electronics companies have to do something. It's not a bad
thing that this option exists," Ii said.
(Reporting by Nathan Layne, Emi Emoto, Tim Kelly and Chikafumi
Hodo; Editing by Edwina Gibbs and Ian Geoghegan)