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Interview

Third Point's Loeb pushes Sony to respond to spinoff proposal

Standalone semiconductor unit would create 'national champion,' investor says

People are reflected on a wall of the Sony showroom building at Ginza shopping district in Tokyo.   © AP

NEW YORK -- A spinoff of Sony's semiconductor business is in the interest of all stakeholders, including shareholders, customers and employees, Daniel Loeb, head of hedge fund Third Point, told Nikkei in an interview.

While noting that there is no deadline for Sony, Loeb said the conglomerate "shouldn't take more than six months to a year" to figure out its response.

Loeb, a prominent activist investor, revealed in a letter to shareholders last month that Third Point has invested $1.5 billion in Sony. But the letter drew more attention for its call for Sony to turn its semiconductor operations, which now account for 15% of group operating profit, into a standalone company.

With spinoffs, "shareholders win because the parent company and the spinoff company do better," he said.

Customers benefit because "focused companies build better products," he said. "So I think it's a win-win for everyone."

Loeb maintained that spinning off the operation would "create a national champion in semiconductors and sensors for Japan."

Activist investor Daniel Loeb has proposed breaking up Sony to increase its value.   © Reuters

Sony's semiconductor business boasts a 50% share of the global market for smartphone image sensors. The company has insisted on keeping development in-house in order to make its smartphones more competitive.

The idea that "there are somehow these synergies that can't be replicated elsewhere is ludicrous," Loeb said, arguing that the relationship can be replicated with a contractual arrangement.

"Most of their sales go to Huawei, Apple and Samsung," he said.

Loeb also questioned Sony's emphasis on synergies with a smartphone business "which is shrinking anyway." The company's strength in image sensors has failed to boost its market share in smartphones, which have been a perpetual money-loser.

Asked how soon he wants to receive a response, the Third Point chief declined to give a formal time limit, saying the fund would accept "any reasonable time it takes" to analyze the proposal and make a decision.

But "it shouldn't take more than six months to a year to figure that out," he said, in a warning to management against ignoring the proposal or trying to kick the can down the road indefinitely.

Japanese enterprises have almost never spun off core businesses for positive reasons, and they may view such proposals as hostile attempts at dismantlement. Loeb's comments suggest that he seeks to end this misconception.

He cited successful U.S. spinoffs such as industrial equipment maker Danaher, which split off its measurement equipment business in 2016, allowing the parent to focus its resources on life sciences. He also mentioned the former Dow Chemical and DuPont, which merged in 2015 before separating into three companies this year, with commodity chemicals going to Dow, specialty chemicals to DuPont and agricultural chemicals to Corteva Agriscience.

The spun-off businesses can invest without being limited by the parent, he argued.

This is not Third Point's first confrontation with Sony. In May 2013, Loeb sent a letter to then-President Kazuo Hirai demanding that the company list part of its entertainment division in the U.S. market. Soon thereafter, he boosted the fund's stake in Sony as high as 7%. While Sony refused, it did agree to improve its information disclosure. The company is unlikely to get away without any changes this time around as well.

Third Point said in 2014 it had sold its Sony stake. Loeb said the fund bought in at about 1,300 yen per share, and the stock has since quadrupled to around 5,800 yen. "Frankly, we should have held on," he said, adding that "we probably left a billion and a half dollars on the table."

But, he went on, Sony is probably cheaper in terms of its price-earnings ratio now than it was then. He estimates its real value at double its current market valuation.

While Third Point is satisfied with its current stake, Loeb indicated that it might buy more if the price went down. "We will hold Sony stock as long as we think it makes an investment, so our time frame could be many, many years," he said.

Third Point often clashes with the management of companies it invests in, demanding that they replace board members or add directors that support the fund's proposals. But Loeb indicated that the dynamic with Sony is friendly at this point, and he praised President Kenichiro Yoshida, who he said "agreed in principle with our observations about the company."

"I don't think we need to ask for a board seat, but I do think they need to diversify their board and have more people that have experience that's aligned with their operations," he said. "Right now, most of the people have semiconductors and electronics experience. Very little experience in gaming, music or entertainment."

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