How Dan Loeb's Sony Split Mirrors Yahoo! Rebirth
NEW YORK (TheStreet) -- Yahoo!
In activist efforts, Loeb of Third Point Capital is banking on the value of some publicly traded businesses owned by Yahoo! and Sony to support a restructuring of their respective core Web portal and electronics operations.
With Yahoo!, Loeb has been active in prodding the company to exit minority interests in Asian e-commerce behemoth Alibaba and Yahoo! Japan, amid a campaign that's also included a revamp of the company's board and multiple CEO changes.
Yahoo! has so-far sold off half of its stake in Alibaba and used the deal to return about $3 billion in cash to shareholders. Investors and analysts continue to use Yahoo!'s remaining 20% interest in Alibaba and a 33% stake in Yahoo! Japan as a key component of the company's overall valuation.
For instance, Yahoo! shares are up over 75% in the past year, partly on optimism new CEO Marissa Mayer can resuscitate the company's core business amid competition from Facebook
A weakening Japanese yen has also supported Loeb's Yahoo! investment and his macroeconomic views. It's no surprise the hedge funder has targeted Sony as his next big turnaround investment.
Earlier in May, Loeb disclosed a 6.5% stake in Sony and a plan to spin off the company's entertainment business in a stock offering. The unit includes movie studios and music labels. Loeb is not advocating Sony sell the cash gushing entertainment business outright, nor is he asking the company to cede control.
In a letter to Sony's board, Loeb proposes the company take public a 15%-to-20% stake in Sony Entertainment.
What would a spinoff of a minority stake in Sony Entertainment accomplish?
First, stock investors might give Sony Entertainment a more full valuation than the unit currently garners as a piece of Sony's conglomerate structure. That's especially the case as shares of media and entertainment behemoths Disney
As with Yahoo!, Sony might gain a new support to its valuation as investors focus on the sum of the company's parts. While Sony has gained over 100% year-to-date and about 10% since Loeb disclosed his proposal, the company's shares remain just half of pre-crisis levels.
Specifically, Loeb argues Sony should offer subscription rights to Sony Entertainment stock to current shareholders rather than a standard IPO. Third Point is willing to backstop the up to $2 billion stock offering, Loeb said in his letter to Sony's board of directors.
A Sony Entertainment share sale will also raise capital for the electronics giant, as it seeks to turn around its core electronics business. The company recently returned to profitability after a record $5.7 billion 2012 loss.
It wasn't so long ago discussion on Sony centered on the company's debt of over 1 trillion Japanese yen and not its turnaround prospects.
According to Loeb, a spinoff of Sony Entertainment will not only bring much needed capital to its money-losing electronics division, it could also pare the parent company's overall debt.
"These transactions would reduce leverage at the parent company and provide much needed growth capital for Sony Electronics," Loeb wrote, in the letter.