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The Deal: Loeb Needles, Prods Sony into Play

NEW YORK ( TheDeal) -- Third Point LLC chief executive Daniel Loeb's letter to Sony Corp., dated Tuesday, May 14, had all the false modesty and deference to decorum one would expect from a hedge fund in heat. Yet its ripple effect could very well put Sony Pictures Entertainment Inc. in play.

That wouldn't be the first step, of course, provided any steps are taken at all. Nonetheless, as step one, Loeb's proposal suggested a subscription rights offering to current Sony shareholders that would create a separate public stock for 15% to 20% of SPE.

The idea would be to showcase the underappreciated value of SPE, which Loeb called Sony's "hidden gem" and defined as "coveted assets in television and motion picture production, an iconic library of movies and television programming, the leading music publishing business, and an exciting array of international cable networks."

However, as high as the hedgie is on SPE assets, he criticized the Sony division's profit margins for sinking to half of those recorded by its peers. Merely bringing them to industry levels, Loeb wrote, SPE's "EBITDA would increase by as much as 50%." And that would translate into "an incremental ¥625 billion [$6.1 billion] in market valuation."

This gain in valuation, while hypothetical, represents an increase in Sony's entire enterprise value of 23% -- and that's after the Tokyo-based company's stock jumped more than 10% per share during Tuesday's trading session. Loeb asserted his proposed subscription rights offering could even be used to goad SPE managers into realizing a more industry-normal valuation by having their compensation based on "the growth of an equity security specifically tied to a company they control."

But that was just the half of it. Loeb also envisioned his right-for-cash subscription plan as generating "meaningful liquidity to inject into Sony Electronics." This division, while the historical favorite of Sony management, was depicted as a post-war wunderkind reduced to a stepchild gone astray. "Of particular regret is Sony's venerable TV business, which has sadly languished as a loss leader for the company for nearly a decade," the hedgie wrote.
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