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.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV