Dan Loeb calls Sony to spin off its semiconductor unit

Bloomberg

Activist investor Dan Loeb disclosed a $1.5 billion stake in Sony Corp. and pushed the company to make dramatic changes, including spinning off its semiconductor business and listing it in Japan.
Sony’s shares rose 3.1% in Tokyo after Loeb’s Third Point published a letter and 102-page presentation pushing for changes at the Japanese media and electronics giant, including sales of its insurance business and stakes in companies like Spotify Technology SA. If the company spins off the semiconductor business and executes on its long-term vision, the newly independent entity could be worth $35 billion within five years, according to the New York-based hedge fund firm.
“We rarely find companies like Sony that have a depressed valuation, high-quality underlying businesses, numerous options for portfolio optimization, and a capable management team,” Third Point said on a website entitled “A Stronger Sony.” “We believe a spin‐off of Sony Technologies brings inherent advantages that will unlock long‐term value.”
Sony is the leader in image sensors used in smartphones and digital cameras. The chips business generated 144 billion yen in operating profit on 879 billion yen of revenue in the latest fiscal year. That’s similar in size to Analog Devices Inc. and Advanced Micro Devices Inc., two companies with market values of more than $30 billion.
But some analysts questioned the proposal, saying the chips unit is better off as part of a larger group. Despite a slowdown in global phone sales, the division has maintained profit growth as newer models adopt more cameras per device.
“I’m uncertain whether a spin off would actually increase value,” said Hideki Yasuda, an analyst at Ace Research Institute. “The semiconductor industry is notoriously volatile and requires constant, huge investments. That’s easier to manage if it’s done as a part of Sony’s bigger group.”
Sony Chief Executive Officer Kenichiro Yoshida hasn’t shown interest in parting with the chips business. He underscored his commitment last month by increasing investment in image sensors to about 700 billion yen in the three years ending March 2021, and unveiled plans for new chip designs outfitted with artificial
intelligence.
“By leveraging the superior technology we have developed in this business, we expect to maintain our industry leading position going forward,” he told investors last month. “We expect this business to generate high return on investment in the long term.”
Third Point also wants sales of its stakes in Sony Financial, M3 Inc, Olympus Corp. and Spotify, which it estimates currently account for about 20% of Sony’s market capitalization. Doing so would give the company cash to invest in its main entertainment business: gaming, music and movies, it said.
Loeb was less concerned with Sony’s legacy electronics businesses, which make TVs, cameras and mobile phones. These assets are smaller than the entertainment operations and they’re “no longer the drag on profitability that they were six years ago,” Third Point said. Cash flow from electronics can be reinvested into entertainment, it added.