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Hedge fund Third Point calls on Sony to spin off semiconductor unit

[June 14, 2019]

By Svea Herbst-Bayliss

(Reuters) - Daniel Loeb's activist hedge fund Third Point LLC called on Sony Corp on Thursday to spin off its semiconductor business and sell off stakes in Sony Financial and other units, in order to position itself as a leading global entertainment company.

This marks the second time in six years that Loeb, one of the world's highest-profile activist investors, has targeted the Japanese electronics maker - although last time he pushed for a radically different shake-up, pressing for a spin-off of entertainment assets.

Reuters reported in April that Third Point was once again targeting Sony. Its stake in the company is now worth $1.5 billion, Third Point said in a letter to investors.

In a 102-page presentation, the New York-based hedge fund also said Sony's stock was undervalued in part because of its complex structure, and urged bold action by management to simplify it.

The semiconductor division is "often treated by investors as an afterthought" and should be spun off into a Japan-listed company called Sony Technologies, Loeb said.

While Japan pioneered the semiconductor industry, other Asian countries have eaten into its market share even as Sony has "held its own," Loeb told investors in the letter.

"New Sony" would become a creative entertainment leader with gaming, music, pictures and electronics businesses, he said.

Sony should also consider selling stakes in Sony Financial Holdings Inc, M3 Inc, Olympus Corp and Spotify Technology SA, Third Point wrote.

By selling off these stakes, Third Point said Sony could "meaningfully reduce complexity" that has been a major negative factor in the company's valuation.

Sony said it would take the input of shareholders "seriously" and "engage in constructive dialogue" with shareholders.

"Sony welcomes investment in the company. We decline to comment on specifics of our dialogue with shareholders," the company said in a statement, when asked about Third Point.

The Japanese company has hired Goldman Sachs to advise on dealing with Third Point, a person familiar with the matter said. A Goldman spokesman declined to comment

Shares of Sony rose as much as 4 percent in Tokyo trade on Friday. The stock is up nearly 15 percent since early April, when Reuters first disclosed that Loeb was building a stake in Sony. That compares to a 3 percent drop in the Nikkei 225 index over the same period.

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Makoto Kikuchi, chief executive of Myojo Asset Management in Tokyo, which does not own Sony shares, questioned the wisdom of spinning off the semiconductor unit, which he said benefited other businesses including the PlayStation.

"It doesn't make sense for Sony to spin off its semiconductor unit as it is one of the successful businesses that contributes to its earnings," he said.

Loeb threw his weight behind Sony Chief Executive Kenichiro Yoshida, saying he could create a "Stronger Sony" by shifting his focus to unlocking the value of its assets.

So far the relationship has been cordial and the two sides met in New York last week, when Loeb and several colleagues walked Sony executives, including Yoshida, through the presentation and the hedge fund's thinking.

For weeks, rumors had surfaced about what Loeb might want Sony to do and how Sony would respond. So far Sony has not indicated what it would do in response to Third Point's suggestions.

When Loeb first approached Sony in 2013, he built a position of roughly $1 billion and hand-delivered a letter to chief executive Kazuo Hirai, calling on the company to spin off part of its entertainment arm. He walked away with a 20 percent gain on his investment, he has said publicly, regretting that he missed out on bigger gains.

Six years later, Hirai has stepped aside as CEO at Sony and a number of tax regulations have changed in Japan, making it more attractive for companies to potentially spin off businesses that don't fit together well.

Loeb is also arriving anew amid a fresh wave of activism in Japan where investors like ValueAct, King Street Capital Management and Fir Tree Partners have pushed for change at Olympus Corp, Toshiba Corp and Kyushu Railway Company.

Japanese companies accustomed to their ways are often reluctant to succumb to investor pressure. However, Loeb is no stranger to challenging companies with long odds of success. Last year, he sought to oust the entire board of Campbell Soup Co, despite the founding family's members controlling much of the U.S. food company. He ended up settling for two board seats.

Third Point returned 9 percent in the first quarter of 2019 fueled largely by gains at Nestle, which was publicly critiqued by the hedge fund in 2018 for its "muddled strategic approach."

(Reporting by Svea Herbst-Bayliss in New York; Additional reporting by Ayai Tomisawa, Taro Fuse and David Dolan in Tokyo; Editing by Leslie Adler and Stephen Coates)

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