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Sony braces for sequel to movie business clash with Third Point

US fund reportedly amassing stake as Amazon and Netflix eye struggling studio

The last time hedge fund boss Daniel Loeb invested in Sony, he scored a nearly 20% gain.   © Reuters

TOKYO -- Sony is back in the crosshairs of U.S. hedge fund Third Point, setting the stage for another fight over the Japanese electronics conglomerate's struggling movie business.

Prominent investor Daniel Loeb's fund pushed Sony hard earlier this decade to reform and unload some of its operations. Now Third Point is reportedly building a stake in Sony again, sparking speculation that it will pressure the company to finally spin off the film segment.

Sony steadfastly rejected the same demand last time, but the pressure may be even greater now that Hollywood is undergoing a transformation and the likes of Netflix and are rumored to be hunting for studios to buy.

Sony's otherwise lackluster stock jumped 9% on the Tokyo market on Tuesday, triggered by a Reuters report that Third Point is looking to raise $500 million to $1 billion for investing in the company's shares. The report did not say how much of an interest the fund had amassed so far, but market players pounced nonetheless.

"Sony's stock price jumped because investors saw Third Point's actions as something hopeful," said Masahiko Ishino, senior analyst at Tokai Tokyo Research Institute. "Sony's stock had been falling since last year so I think many investors saw it as a chance to invest a small amount in order to see how the market reacts."

Both Third Point and Sony declined to comment on the report.

Sony is unlikely to let the movie business go easily -- not when it has repeatedly emphasized a strategy of creating synergy between its electronics and various entertainment operations. The company's midterm management plan, announced last May, spoke of "moving people emotionally," a goal for which movies would seem tailor-made.

Either way, Loeb is apparently looking for another windfall after his last bet on Sony paid off handsomely.

Third Point began purchasing Sony shares in the fall of 2012 and at one point owned roughly 7%. Loeb led a campaign to urge the company to list its movie and music arms and carry out structural reforms in its television and PC segments.

Sony did sell its money-losing Vaio PC brand in February 2014, and that October the fund sold its shares for a nearly 20% gain. Through it all, however, Sony insisted it would not give up on movies.

In a letter to Third Point in August 2013, Sony said its board and management team unanimously agreed that "continuing to own 100% of our entertainment business is fundamental to Sony's success." The company stressed that a rights listing or public offering of the business would force it to pay heed to minority shareholders, limiting its "control and strategic flexibility."

Sony has never changed its tune on this. On the contrary, it has reinforced its commitment to entertainment.

In the music sector, Sony made EMI Music Publishing a wholly owned subsidiary in November 2018, having done the same with Sony/ATV Music Publishing in 2016. Sony has spent more than $3 billion on mergers and acquisitions in the sector.

In the management plan announced in May, which runs through March 31, 2021, Sony also stressed it wanted to "get closer to people." President and CEO Kenichiro Yoshida said Sony would "reinforce intellectual property rights" with content creators and build a community "where people share emotionally moving experiences and interests."

Sony President Kenichiro Yoshida insists the entertainment business will reinforce Sony's game and electronics operations. (Photo by Keiichiro Sato)

Sony views its game and movie segments as naturally complementary.

The PlayStation 4 was a huge hit, and though the console is nearing the end of its life cycle, the company has built a large base of online gamers worldwide. Monthly active members of its PlayStation Network service topped 90 million at the end of November 2018.

In a testament to the potential power of movie-game franchises, sales of the PS4 title "Marvel's Spider-Man" -- based on Sony Pictures Entertainment's "Spider-Man" film series -- exceeded 9 million units from its release on Sept. 7 to Nov. 25.

But Sony might want to check its spidey senses.

The report of Third Point's maneuvering comes weeks after Walt Disney closed a $71.3 billion acquisition of 21st Century Fox, one of Hollywood's "big six" studios. Disney's move is fueling stock market expectations for a further shakeout in the industry, and many believe the next targets will be Viacom's Paramount Pictures and Sony Pictures Entertainment.

The Reuters story quoted sources as saying that Third Point believes Amazon and Netflix are interested in snapping up SPE.

The low profitability of the business -- long a source of investor discontent -- could make it difficult for Sony to stand firm. In fiscal 2016, the company booked an impairment loss of 112.1 billion yen ($1.01 billion) on goodwill in the business, due to weak demand for DVDs and other packaged products. In fiscal 2018, the ratio of operating profit to sales came to an estimated 5%, compared with 10% in Sony's overall operations.

Moreover, Sony has yet to address the segment's high-cost structure despite Third Point's past pressure to correct it.

Conditions in the movie business are growing harsher as the competition shifts from cinemas and video rental shops to online streaming. Netflix and Amazon, which have used their strong capital bases to build global streaming networks, are actively investing in film production. Put another way, they are seeking to dominate both the development of content -- traditionally the role of studios like SPE -- and the delivery.

Apple, meanwhile, announced plans to launch a movie streaming service this fall.

Sony is trying to avoid direct confrontations with the information technology giants, while putting its own spin on the content creation and delivery strategy.

At this year's Consumer Electronics Show in Las Vegas, Yoshida declared that Sony is a "creative entertainment company." Sony's electronics technology, the president suggested, will both support the creation of high-quality content and provide it directly to consumers.

So Third Point can expect strong resistance from Sony's management if it demands a movie business spinoff. But Sony will also be feeling pressure from the market to turn Yoshida's vision into moneymakers -- or bow to the changes blowing through the industry.

Nikkei staff writer Jada Nagumo contributed to this article.

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