Breakingviews - Dan Loeb pushes a hidden Sony jewel into the light

An employee takes a photo on a new Sony Xperia 10 Plus in this posed photograph at a pre-launch event at the Sony offices in London, Britain February 14, 2019. Picture taken February 14, 2019. REUTERS/Simon Dawson

HONG KONG (Reuters Breakingviews) - Daniel Loeb has pushed a hidden Sony jewel into the spotlight. The activist behind hedge fund Third Point wants the $60 billion Japanese conglomerate to spin off its chips business, among other things. It is a sensible step towards simplifying the sprawl.

The company led by Kenichiro Yoshida is known for its PlayStation video games console, plus an expanding entertainment empire of box office hits like “Venom”, and a music catalogue that runs from Beyoncé to the Backstreet Boys. Yet the Tokyo-based outfit has also quietly built up a semiconductors business. It is now the world’s top maker of image sensor chips, used mostly in smartphone cameras. In the year ended in March, the unit accounted for 16% of Sony’s total operating profit of roughly $8 billion.

This is what Loeb has set his sights on. His fund, which says has invested $1.5 billion in Sony, is calling for Yoshida to spin off chips into a standalone company. The rebranded Sony Technologies could be worth $35 billion within five years, the activist argues.

Splitting the pure-play chips business from the media group makes sense. Sony’s shares trade at just 12 times forward earnings, Refintiv data show, trailing rival video games group Nintendo’s 18 times, and well below established entertainment groups like Walt Disney and Vincent Bolloré’s Vivendi. Separating semiconductors, which require significant investment, would leave Sony room to spend elsewhere.

There are valid reasons for Yoshida to hold back, though. For one, some 90% of Sony’s chips revenue comes from smartphones, Macquarie analysts reckon. That makes the business vulnerable as a tech cold war between Washington and Beijing escalates. Huawei, the Chinese titan that has been banned from working with U.S. tech firms, is a major Sony customer, for instance. Analysts at Jefferies recently slashed their operating profit forecast for the Japanese chips unit by 45% as a result.

The longer-term outlook looks shinier. Global smartphone sales are falling, but the number of cameras per phone is going up. Sony will also benefit as automakers and consumers embrace autonomous driving, which will require cars to be equipped with ever more image sensors.

Thursday’s letter will draw attention to a unit investors give Sony little credit for. Yoshida can at least consider Loeb’s big picture.


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