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Daniel Loeb calls on Sony to spin off sensor business

US activist investor with $1.5bn stake launches second campaign on Japanese group

TOKYO/NEW YORK (Financial Times) -- U.S. activist investor Daniel Loeb has called on Sony to spin off its "crown jewel" image sensor business to unlock the Japanese group's true worth as a global entertainment powerhouse.

In a letter to investors on Thursday, Third Point publicly acknowledged for the first time that it had reinvested in Sony through a $1.5 billion stake. The move launches its second campaign since the hedge fund failed in 2013 to persuade the Japanese conglomerate to sell a part of its entertainment business.

In this week's letter, Loeb said Sony's shares remained heavily undervalued despite its recent turnaround due to the complexity of its portfolio including electronics, image sensors used in Apple's iPhones, games, films, music and financial services. He called it "one of the most undervalued large-cap businesses in the world today."

In a reversal from his 2013 campaign, Loeb urged Sony to focus on being a global entertainment company, redeploying cash from its TV and cameras business to focus on gaming, music, and film and television. He also called for the sale of its shareholdings in Sony Financial, M3 Inc., Olympus and Spotify.

"When you think of Sony, you think of the Walkman, you think of the consumer electronics business, you know they own a movie studio and some music, but you don't think of them as a Japanese national champion in technology, with a $20 billion going to $35 billion valuation business in sensors," Loeb told the Financial Times.

While Loeb stressed in the letter that Sony's management have had "an open approach to our dialogue," he also launched a website to lay out his fund's 104-page thesis on improving the business.

Round two of the Sony-Loeb tussle comes as corporate Japan contends with an increased wave of activism. At least six of the country's biggest corporate names, including Toshiba, Lixil and Japan Railways, are wrestling with investor demands for change.

Compared to six years ago, Loeb faces a more confident Sony than when the company previously rejected his demand to sell part of its entertainment business through a public offering. The group is now armed with a stronger business portfolio and record profits following a long phase in its restructuring where it sold off its batteries, chemicals and Vaio PC businesses. The executor of that turnaround plan, former chief financial officer Kenichiro Yoshida, now runs the company.

If Sony was not accustomed to dealing with activists when it first faced off with Loeb, the company is better prepared this time. It has already hired Goldman Sachs and a PR agency, and has formed special communications and investor relations teams to prepare for the new campaign.

The company has yet to respond directly to Loeb's proposal, which he presented to them during a meeting with shareholders in New York. Executives from Sony listened and did not push back on his ideas, but did not openly agree with them, either.

Yoshida has stressed that the diversity of Sony's business portfolio is its strength. Still, even if Sony is against the sale of its core image sensor business, analysts believe Loeb's campaign could pressure the group to make other changes.

Back in 2013, the Japanese company rebuffed Loeb's proposal but Yoshida has said the experience has been good for Sony since it encouraged better disclosure of its entertainment business and a management shake-up in Hollywood.

In its first campaign, Third Point walked away from Sony with a 20% return on its initial $1.1 billion stake. But Loeb, who underestimated the company's ability to turn around its struggling electronics businesses, missed out on a near-tripling in Sony shares in subsequent years.

When Sony shares slumped in late March in response to the news that Google was launching a gaming business, Third Point bought the bulk of its stake from an investor who was unloading it.

The company's shares have risen 11% since an April 8 report by Reuters that Third Point was building a stake for the second time.

Loeb wants Sony's "dramatically underappreciated" semiconductor business, which accounts for 20% of profits, to be an entirely separate public entity, dubbed Sony Technologies and listed in Japan. The unit is the world's largest image sensor manufacturer, creating parts for use in smartphones and cars.

"We're looking to make contributions," Loeb said. "We're trying to make them think of things that are a bit bolder than they otherwise might consider."

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