Analyst makes case for separating Sony from Sony Pictures

By Daniel Miller

May 14, 2013 2 PM PT

Observers spent Tuesday morning reading Sony Corp.’s tea leaves in the aftermath of a hedge fund’s proposal that the company take its entertainment arm public.

Sony’s stock soared about 10% in afternoon trading after New York hedge fund Third Point proposed that the electronics and media giant make a public offering of up to 20% of Sony Entertainment Inc. That unit includes film and television studio Sony Pictures Entertainment, Sony/ATV Music Publishing and Sony Music Entertainment.

Brian Wieser, a senior analyst with Pivotal Research Group, said that there is “good value inside of Sony Pictures,” but noted that some investors may not be aware of the strengths of the company -- which extend beyond its film business -- because it is part of a large corporation.

“Most investors don’t like the movie business because it is too volatile, too hard to predict. But you don’t have to like the movie business to like SPE. A substantial share of the profitability is coming from outside the film studio,” from divisions that cover home entertainment and television programming, said Wieser in a telephone interview Tuesday morning. “That is hard to unlock if you are buried inside a large electronics company.”

Last year, the studio released blockbusters “Skyfall” and “The Amazing Spider-Man.”

Third Point Chief Executive Daniel Loeb outlined his proposal in a letter to Kazuo Hirai, Sony’s president and chief executive. The letter, dated Tuesday, was hand delivered to the executive.

“Many casual observers would be surprised to learn that while Sony is electronics, much of its current value is derived from a hidden gem -- Sony’s Entertainment division,” wrote Loeb, adding that an infusion of capital would help Sony with its “burdensome debt” and provide it with the financial resources to improve its electronics business. Third Point holds $1.1 billion worth of Sony shares.

Last week, Sony Corp. announced that it swung to its first annual profit since 2008, aided in part by its movie studio. The company posted annual net income of $458 million for the fiscal year ended March 31. Last year, the company lost $456.7 million.

A big part of the success was Sony Pictures. The division posted operating income of $509 million, up 40% from a year earlier. Sony attributed the improvement in part to “Skyfall” and “The Amazing Spider-Man.”

Under the terms of Loeb’s proposal, Sony would retain a majority stake in Sony Entertainment, which is headed by Chief Executive Michael Lynton.

Shiro Kambe, a Sony spokesperson, said in a statement that the company welcomes investment in the company, before adding that Sony Entertainment is not for sale.

“We are focused on creating shareholder value by executing on our plan to revitalize and grow the electronics business, while further strengthening the stable business foundations of the entertainment and financial service businesses,” Kambe said.

Wieser, who covers media companies, wrote in a Tuesday research note that Sony Pictures’ parent company has “never bridged a significant cultural gap nor overcome its hierarchical bureaucracy to work better with the U.S.-centered operations of SPE.” He wrote that this issue -- and a corporate focus on consumer electronics -- has kept the studio from growing its profitability.

He also said that Sony Pictures’ television production business includes “significant” on-air and library content -- such as NBC’s “Community,” AMC’s “Breaking Bad” and syndicated programs “Wheel of Fortune” and “Jeopardy.” Wieser said the value of these assets would be more apparent to investors if the studio were separated from its parent.

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