Billionaire investor Daniel Loeb likely faces an uphill battle to convince Sony Corp to embrace his proposal to spin off its entertainment arm, but he likely already holds a winning hand in his bet on the Japanese electronics giant.
Loeb, who has made big profits on his bets on Greek bonds, mortgages, website operator Yahoo Inc and a fall in the Japanese yen, on Tuesday disclosed that he holds a bit more than 6 percent of Sony and said a spinoff of the company's entertainment arm "could result in as much as 60 percent upside to Sony's share price."
Loeb and investors in his hedge fund Third Point Offshore are already reaping the benefits of a well-timed move into Japan. The fund, the flagship portfolio of his company Third Point LLC, is up 13.3 percent this year, thanks in part to Loeb's bets on a decline in the yen and a rise in Japan's Nikkei stock index.
Japanese companies are faring better thanks to policy makers' push for growth-oriented strategies and the weaker yen, which is helping exports. Since the start of the year, the price of Sony's Tokyo-listed stock has climbed 96 percent.
For Loeb, his investment in Sony is already paying off. While it is unclear exactly when Loeb started buying stock in Sony this year, a rough calculation suggests that since Friday he has earned about $200 million on the bet, based on the price of Sony's American Depository Receipts. The gain could be larger or smaller due to currency moves and any possible hedges by Loeb.
Such a big payoff in such a short time suggests there is more money to be made for the New York-based firm. And Loeb's track record as an activist investor, as seen in his tenacious approach to Yahoo, suggests that Third Point will stick around for a while on Sony.
Not all of Loeb's bets are for the long term. At a recent investor conference in Las Vegas, Loeb described himself as pragmatic and opportunistic. One of his recent short-term bets was on Herbalife Ltd, the diet supplements company that has become a Wall Street battleground over conflicting views of its prospects for big success or dismal decline.
Loeb got out with a profit of $50 million on his 8.2 percent stake in Herbalife, people familiar with the trade said.
On investments in Japan, Loeb waded in last year with his bets on the yen and the Nikkei stock index, and his success in this "macro trade" led him to direct stock investments, a person familiar with his fund said.
Other investors have also struck it rich with Japan trades. Kyle Bass, who runs Hayman Capital and is a friend of Loeb's with whom Loeb often mulls trading ideas, said his Japan Macro Opportunities Master Fund surged 39.52 in March, leaving it up 251.70 percent for the first quarter, according to a document sent to investors and seen by Reuters.
And Hayman says Japan Macro has a unique structure that does not fully reflect the entire fund's performance,
Now Loeb is taking things a step further as Japan's economy appears to be growing again, taking the boldest step in years to try and bring activist investing to Japan.
Whether Loeb will succeed in coaxing Sony to spin off its entertainment unit, however, is far from clear, say analysts who have kept a close eye on Japan ever since hedge funds Steel Partners and The Children's Investment Fund's failed to boost share prices of Japanese companies in which they invested a few years ago.
Warren Lichtenstein's Steel Partners, for example, tried to win seats on the board of Japanese brewer Sapporo Holdings. Lichtenstein had been Sapporo's biggest investor for years, but other shareholders voted down his proposal to replace most of the company's directors in 2010 and he began selling the stake. He has liquidated his Japan-focused fund.
"The culture in Japan is one of conflict avoidance, and pressuring for change is seen as disrespectful. So it is a difficult road to walk," said Damien Park, who tracks activists as president of consulting firm Hedge Fund Solutions.
Still, Loeb - who has amassed a strong record in his 18 years of running Third Point, with his flagship fund returning an average 18 percent per year - is not easily deterred, say people who know him.
He waged a no-holds-barred attack on Yahoo's top leadership two years ago. He now has a seat on the board and helped hire Marissa Mayer away from Google, installing her as chief executive. He took particular offense at suggestions that he was an investor with a short-term horizon.
"I have never been asked about this alleged short-term bias nor was there any evidence to indicate that our investment model is predicated on short-term trading," Loeb wrote to former Yahoo CEO Scott Thompson.
"On the contrary, a review of our record would indicate that we frequently hold positions for many years at a time (we have held our current position in Delphi Automotive since June 2008 and we held our Dade Behring position for nearly half a decade before it was sold to Siemens in 2007, as just two examples of many long-term investments)," he added.
After having kept a relatively low profile since penning his acerbic letters to Yahoo in 2011, Loeb appears to be taking a new tack in his current activist approach. One prominent difference is that he is not looking to throw out management at Sony, a person familiar with his plans said.
In fact, Loeb, known for his often blunt manner, orchestrated a respectful overture at Sony that included flying to Tokyo for a direct meeting with the company's president and CEO, Kazuo Hirai, and, later, personally handing him a politely worded letter describing his proposed changes. Loeb and his team even debated over exactly how to address the 52-year-old Hirai and show respect.
In the letter, Loeb, 51, flattered the corporate chief, saying he wanted to help Sony achieve the goals it had set for itself.
Even Sony's immediate response that the entertainment division was not for sale, did not ruffle feathers in the Loeb camp. "That's bound to expected that they would say that," said one person familiar with the meetings who is not permitted to speak about them publicly.
Still, outside analysts said it will be interesting to watch the process move forward. While activism is only one of Loeb's many strategies, one person who has known him for years said, "This is in his blood."
And even in his letter, he showed his traits, if just a little. "So while Third Point supports your agenda for change, we also believe that to succeed, Sony Must Focus. In a spirit of partnership, we offer our timely plan to strengthen Sony," Loeb wrote.
(Reporting by Svea Herbst-Bayliss in Boston; Editing by Leslie Adler)