News

Third Point Highlights Compelling Opportunities for Value Creation at Sony Corporation

Shares Letter and Accompanying Presentation with Fund Investors
Disclosing Holding and Outlining
Paths to Create “A
Stronger Sony” For All Stakeholders

Proposes Spin-Off of Semiconductor Company, Publicly Listed in
Japan, Highlighting the Business as a Japanese National Technology
Champion; Division Is Currently Underappreciated Despite Its Impressive
Position in a Growing Global Industry

NEW YORK–(BUSINESS WIRE)–Third Point (LSE: TPOU), a global alternative investment firm managing
approximately $15 billion in assets, today released a detailed letter
and over one-hundred page presentation highlighting the overlooked
strength of Sony Corporation’s (“Sony” or the “Company”) (NYSE: SNE;
TSE: 6758) well-managed businesses and the opportunities for substantial
value creation that exist at the Company. Third Point believes there are
clear paths available to create “A Stronger Sony” to serve the long-term
interests of its stakeholders.

Third Point’s letter
to its investors and presentation
on Sony
can be found at www.AStrongerSony.com.

Below is the full text of the letter issued today.

***

June 13, 2019

Dear Investor:

Third Point has invested $1.5 billion in Sony Corporation because we
believe it is one of the most undervalued large cap businesses in the
world today. Sony’s valuation does not reflect either the quality of the
Company’s businesses or the opportunity to create meaningful, long-term
value through targeted capital allocation and further operational
improvement.

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. These conditions are
reminiscent of our 2017 investment in Nestlé.1 Over the past
two years, we have provided constructive input to Nestlé’s CEO Mark
Schneider and the Board, during which time the company has improved
organic sales growth and operating margins, returned CHF 20 billion of
capital to shareholders via buybacks, upgraded its Board, and focused
its portfolio by divesting non-core assets, recycling the proceeds into
high-quality acquisitions. Today, we see a similar opportunity to unlock
value in Sony, a company we know well.

We first invested in Sony in 2013 because we believed it was inexpensive
due to inadequate investor disclosure, excessive debt, an overly complex
corporate structure, and consistent losses in its consumer electronics
segment. We also recognized that the Company had tailwinds for change,
driven by Japan’s then newly-elected Prime Minister, Shinzo Abe, who had
articulated an ambitious Three Arrows plan for economic reform. Since
2014, under the skilled leadership of the prior CEO, Kazuo Hirai, and
Kenichiro Yoshida (first as CFO and now as CEO), Sony’s business has
undergone a dramatic transformation. Yet, despite these substantial
improvements, Sony continues to be as undervalued today as it was in
2013, trading at its lowest forward multiple of earnings in the last
decade.

Now that Sony is on a better path operationally, we believe CEO
Yoshida-san has an opportunity to create a “Stronger Sony” by shifting
his focus to unlocking the value of the Company’s tremendous portfolio
of assets. With the stock trading today at just 11x 2020 EPS, we see
compelling upside from current levels catalyzed by a deliberate
portfolio review, focused capital allocation, and strategic
reorganization.

Long-considered a consumer electronics company, today Sony generates
over 75% of its profits from four “crown jewel” businesses: Gaming,
Music, Pictures, and Semiconductors.

  • Gaming: Sony’s PlayStation gaming franchise represents the
    world’s largest video game business by revenue, with a
    current-generation console installed base approaching 100 million
    globally, more than double the scale of its closest competitor,
    Microsoft’s Xbox. Over the past six years, PlayStation has
    successfully evolved from a low-margin hardware manufacturing business
    to a high-margin software and subscription services platform, with
    revenue increasingly generated from non-cyclical sources such as
    in-game purchases, first-party software sales, and recurring payments
    from Sony’s 36 million PS Plus subscribers. Recent competitive fears
    relating to new entrants in cloud gaming are overblown, as Sony
    currently operates the world’s largest cloud gaming service (PS Now)
    with a five-year head start relative to cloud competitors.
  • Music: Sony is one of three major players (along with Universal
    Music Group and Warner Music) that dominate the recorded music and
    music publishing industries. Subscription-based streaming services
    like Spotify, Apple, and Amazon have reversed a multi-decade decline
    in music industry revenues and the industry is now experiencing rapid
    growth and expanding margins. With the 2018 acquisition of EMI, Sony
    wisely doubled down in music and, in the process, became the largest
    music publisher in the world.
  • Pictures: As one of the five largest Hollywood studios, Sony
    Pictures benefits from a rich library of iconic intellectual property
    that spans nearly a century. Following a wave of consolidation in the
    media space over the last two years, Sony Pictures remains one of the
    few independent film studio franchises not owned by a major telecom or
    media distribution company (e.g. Comcast, AT&T, Disney); this
    independent status provides Sony a competitive advantage, as it
    remains free to license television and movie content to any of the
    well-funded and fast-growing streaming platforms in the market such as
    Netflix, Amazon, and Apple.
  • Semiconductors: With an over 70% market share in smartphone
    image sensors (which power digital cameras on phones), Sony has
    exposure to an end-market with one of the best secular outlooks in the
    semiconductor industry. Photo and video imaging are becoming more
    important parts of the smartphone and the automobile, driving
    sustainable content growth well in excess of unit volumes in each of
    these large markets.

These four segments have generated a 38% CAGR in operating profit over
the past five years. Given the secular themes to which these businesses
are exposed, we expect robust earnings growth to continue. So why does
this company trade at just 11x earnings, a substantial discount to the
market and a multiple befitting a declining business, rather than one
moving from strong to stronger?

We believe Sony’s valuation discount is attributable primarily to
portfolio complexity, which will be a permanent problem unless it is
decisively addressed. We have seen countless “conglomerate discounts”
over the years where investors consistently discount valuation or avoid
certain stocks altogether due to the challenges of forecasting numerous,
unrelated business drivers.2 Of the 14 sell-side analysts
covering Sony’s stock, only two have relevant internet and entertainment
backgrounds; the rest are Asia-focused electronics analysts. Third
Point’s own diligence required the simultaneous efforts of numerous
sector teams across media, semiconductors, financials, and even
healthcare to understand Sony’s businesses. This process yielded strong
conviction in Sony’s untapped value, as was the case in 2013. The
difference today is that Sony is now poised to address its portfolio
complexity and the resulting valuation discount.

There are many paths to unlock Sony’s value. Sony has a net cash balance
sheet, generates a 7% unlevered FCF yield (despite significant growth
investments in image sensor fabrication capacity), and owns stakes in
publicly-listed companies totaling over $12 billion (nearly 20% of its
total market capitalization). This opportunity set is staggering: if
management were to monetize these stakes and take leverage to a
conservative 1.0x, the company would have $34 billion of capital to
invest for growth or return to shareholders, equal to more than 50% of
the current market capitalization. Encouragingly, it appears Sony
management shares our view. In February, the company announced a ¥100
billion (~$900 million) share repurchase, its first buyback in 15 years.
This was followed by an additional ¥200 billion (~$1.8 billion)
repurchase announcement in May.

Today, Sony trades at roughly half our estimate of intrinsic value, with
additional upside from optimizing capital allocation.

A Stronger Sony

In order to release this value and put the Company on an even stronger
footing for the future, we believe that Sony should: 1) consider a
spin-off of its semiconductors division into a standalone public stock,
re-named “Sony Technologies”, to be listed in Japan; 2) position New
Sony as a leading global entertainment company; 3) consider the
divestiture of its public equity stakes in Sony Financial, M3 Inc,
Olympus, and Spotify, and; 4) optimize its capital structure. We make
these recommendations with Sony’s long-term success at the forefront of
our considerations and believe these actions will help Sony to more
effectively and sustainably grow value for stakeholders in the decades
to come.

Semis: A Japanese Technology Champion
Sony’s semiconductor
business is dramatically underappreciated by the market despite its
position as the global leader in image sensors with over 70% revenue
market share of the smartphone image sensor market. Japanese companies
pioneered the semiconductor industry more than 60 years ago, and at one
point commanded a dominant 40% global market share. While Japan has
ceded semiconductor market share to other Asian countries, Sony
Semiconductors has held its own, demonstrating strong revenue growth and
technological prowess. Contributing only 18% of Sony’s consolidated
earnings, this division is often treated by investors as an afterthought
despite its status as one of Japan’s leading technology companies.

In 2017, the Japanese government passed tax reform legislation that
allowed companies to spin-off divisions “tax-free.” Nikkei explained:
“Next fiscal year’s package will seek to encourage management to act
boldly with shareholders in mind. Part of the plan is to reduce the tax
on spinoffs, which can give the newly hatched company more freedom over
its operations and help change the makeup of industries.”3

As a standalone public company listed in Japan, Sony Technologies would
be a showcase for Japan’s technology capabilities. Rather than just an
uncut rough stone buried inside Sony’s portfolio, Sony Technologies
would be visible as a Japanese crown jewel and technology champion. The
company would attract a new cohort of dedicated semiconductor investors
with an appropriate appreciation for the growth profile, capital needs,
and cyclicality of this asset. With its own board and management team,
Sony Technologies can focus 100% on maintaining its leading position in
the fast-growing image sensor market. Perhaps most importantly for its
long-term success, Sony Technologies would be able to invest more deeply
in capex and R&D, without compromising the strong free cash flow profile
of Sony’s entertainment assets. If Sony Technologies lists in Japan and
executes on the long-term vision articulated at the 2019 IR day, we
believe it could be a $35 billion public company within five years.

“New Sony”: A Creative Entertainment Leader
Sony’s gaming,
music, and pictures segments would become the Company’s core after the
Semiconductor spin. As capital-light, high-growth businesses, they too
will benefit from a standalone public listing and management team. New
Sony’s portfolio would include the largest console gaming platform in
the world as well as a top 10 mobile game studio; the #1 music
publishing and #2 recorded music company globally; and one of the
world’s top five film/TV studios. New Sony is levered to three of the
most important secular growth drivers in the media space: 1)
accelerating growth in console gaming revenue driven by in-game
purchases and live services; 2) the shift in music and video consumption
to subscription-based streaming services; and 3) the rising strategic
value of music rights and film/TV libraries amid fierce competition for
content among streaming distribution platforms. We believe that these
tailwinds would enable the pro forma company to grow EBIT at a 10%+ CAGR
going forward. With its robust cash flow generation, New Sony would be
able to rapidly grow earnings and return substantial capital to
shareholders, a rare combination.

While small relative to the entertainment assets, Sony’s legacy
electronics assets are no longer the drag on profitability that they
were six years ago and will be a meaningful cash flow contributor to New
Sony. Thanks to focused management intervention, TVs and cameras are
solidly profitable, and aggressive actions are being taken to improve
the profitability of mobile phones. The free cash from these businesses
can be redeployed into entertainment investments, and as entertainment
grows, electronics will become a smaller percentage of New Sony’s value
and narrative over time.

Sony’s Listed Stakes and Capital Structure
We also encourage
Sony to consider whether its listed stakes and capital structure are
best serving the company’s stakeholders. With its robust financial
profile, Sony no longer relies on Sony Financial’s cash flow. The other
businesses (M3, Spotify, Olympus) contribute very little to the
Company’s earnings, but have significant value. Recent Japanese
corporate governance reforms have urged companies to divest
cross-shareholdings and doing so would allow Sony to lead by example as
corporate Japan evolves. We believe the proceeds of these divested
stakes should be invested in long-term growth or capital return to
shareholders.

Finally, with its strong cash flow generation, we believe that Sony can
modestly increase its leverage to 1.0x net debt/EBITDA to increase ROE
and improve its balance sheet efficiency. This would bring leverage in
line with global media and entertainment peers, most of which have
leverage in the 1-2x range.

Conclusion

We are pleased to have played some role in drawing the market’s
attention to Sony’s undervalued franchises six years ago, and today, we
again see a clear case for value that the market fails to appreciate.
The difference between now and 2013 is that Sony is in an excellent
position to do something about its conglomerate discount. At www.AStrongerSony.com,
we share more of our analysis about the optimal routes for value
creation at the Company. We have shared these views with Sony and
appreciate management’s open approach to our dialogue. We look forward
to working together to create long-term value for the Company’s
stakeholders by building an even Stronger Sony.

Sincerely,
Third Point LLC

The information in this presentation is for information purposes
only, and this presentation does not constitute an offer to purchase or
sell any security or investment product, nor does it constitute
professional or investment advice. The information in this presentation
is based on publicly available information about Sony Corporation (the
“Company”). Except where otherwise indicated, the information in this
presentation speaks only as of the date set forth on the cover page, and
no obligation is undertaken to update or correct this presentation after
the date hereof. Permission to quote third party reports in this
presentation has been neither sought nor obtained.

This presentation may include forward-looking statements that reflect
the current views of Third Point LLC or certain of its affiliates
(“Third Point”) with respect to future events. Statements that include
the words “expect,” “intend,” “plan,” “believe,” “project,”
“anticipate,” “will,” “may,” “would,” and similar words are often used
to identify forward-looking statements. All forward-looking statements
address matters that involve risks and uncertainties, many of which are
beyond the control of the parties making such statements. Accordingly,
there are or will be important factors that could cause actual results
to differ materially from those indicated in such statements and,
therefore, you should not place undue reliance on any such statements.
Any forward-looking statements made in this presentation are qualified
in their entirety by these cautionary statements, and there can be no
assurance that the actual results or developments anticipated will be
realized or, even if substantially realized, that they will have the
expected consequences to, or effects on, the Company or its business,
operations, or financial condition. Except to the extent required by
applicable law, we undertake no obligation to update publicly or revise
any forward-looking statement, whether as a result of new information,
future developments, or otherwise.

Third Point currently has an economic interest in the price movement
of the securities of the Company. It is possible that there will be
developments in the future that cause Third Point to modify this
economic interest at any time or from time to time. This may include a
decision to sell all or a portion of its holdings of Company securities
in open market transactions or otherwise (including via short sales),
purchase additional Company securities (in open market or privately
negotiated transactions or otherwise), or trade in options, puts, calls
or other derivative instruments relating to such securities. Third Point
also reserves the right to take any actions with respect to its
investment in the Company as it may deem appropriate, including, but not
limited to, communicating with the board of directors, management and
other investors.

Although Third Point believes the information herein to be reliable,
Third Point makes no representation or warranty, express or implied, as
to the accuracy or completeness of those statements or any other written
or oral communication it makes with respect to the Company and any other
companies mentioned, and Third Point expressly disclaims any liability
relating to those statements or communications (or any inaccuracies or
omissions therein). Thus, shareholders and others should conduct their
own independent investigations and analysis of those statements and
communications and of the Company and any other companies to which those
statements or communications may be relevant.

***

About Third Point

Third Point is a New York-based global alternative investment firm
managing approximately $15 billion in assets for public institutions,
private entities and qualified individual clients. The firm was founded
in 1995 by Daniel S. Loeb, who serves as Chief Executive Officer and
oversees all investment activity. It employs a flexible, opportunistic
investment style – one that seeks to identify situations with a
recognizable catalyst which we anticipate will unlock value.

__________________________

1 Like our investment in Nestlé, our Sony investment is also
made in part via a special purpose vehicle created for this opportunity.

2 In 2018, Goldman Sachs summarized this argument, writing:
“The complexity of Sony’s business structure, which ranges from video
game platforms to cutting-edge semiconductors and life insurance…appears
to have discouraged entry by a broad range of investors. If investors
were to invest in Sony in order to profit from earnings growth driven by
the shift to digital distribution in the game and network services
business, the firm’s largest business, they would also need to accept
risks arising from competitive conditions in the semiconductor business
and restructuring in the mobile communications business since games
account for less than 40% of total earnings.”

3 “Japan Eyes Tax Break for Spinoffs.” Nikkei Asian Review,
Nikkei. 19 November 2016. https://asia.nikkei.com/
Politics/Japan-eyes-tax- break-for-spinoffs

Contacts

For Media:

Third Point LLC
Elissa Doyle, 917-748-8533
Chief Marketing
Officer
edoyle@thirdpoint.com

error: Content is protected !!