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Could Dan Loeb’s Changes Bring Sony’s Lost Glory Back?

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Third Point’s Dan Loeb proposes changes at Sony

In a note and presentation last week, Third Point’s CEO, Dan Loeb, made a case for why Sony (SNE) stock is much more than the sum of its parts. Third Point holds a $1.5 billion stake in the company. Dan Loeb has proposed a detailed plan on how the company can unlock value through capital allocation and further operational improvement. Loeb suggests that the company spin off its semiconductor business into a new company called “Sony Technologies” and then focus on gaming, music, and pictures as “New Sony.”

Third Point has been instrumental in effecting change at many companies. Over the past two years, it has provided suggestions and inputs to Nestlé (NSRGY) that have been instrumental in improving Nestlé’s organic sales growth and operating margins.

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Sony’s lost glory

Sony was once a market leader in consumer electronics, but it’s now lagging behind its peers. Its previously thriving gaming business (GME) is also under pressure. Google’s (GOOGL) recent announcement about pushing into the gaming business with a cloud-based offering increased pressure on gaming stocks, including Nintendo (NTDOY) and Sony.

Previously, Loeb had bought a stake in Sony in May 2013 and pushed to partially spin off its entertainment units into a separate company. Loeb gradually lowered his stake after he was unsuccessful in persuading the company.

Sony’s valuation discount

Sony shares are currently trading at ~11.0x the company’s forward earnings, as per Thomson Reuters, below Nintendo’s (NTDOY) 18.4x and Canon’s (CAJ) 15.9x—and way below Disney’s (DIS) 21.7x.

Sony is also trading at its lowest forward multiple, compared to its historical ten-year multiple. Loeb mainly attributes Sony’s peer discount to its portfolio complexity. He provides context by saying that, of the 14 sell-side analysts currently covering the company, only two have relevant internet and entertainment backgrounds. He therefore argues that spinning off the relatively unrelated semiconductor business could unlock value for the company.

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