How Dan Loeb's Sony Split Mirrors Yahoo! Rebirth

NEW YORK ( TheStreet) -- Yahoo! ( YHOO) and Sony ( SNE) occupy altogether different corners of the technology world, however, Daniel Loeb, a top shareholder, may be using a similar playbook in his attempts to revive both tech pioneers.

In activist efforts, Loeb of Third Point Capital is banking on the value of some publicly traded businesses owned by Yahoo! and Sony to support a restructuring of their respective core Web portal and electronics operations.

With Yahoo!, Loeb has been active in prodding the company to exit minority interests in Asian e-commerce behemoth Alibaba and Yahoo! Japan, amid a campaign that's also included a revamp of the company's board and multiple CEO changes.

Yahoo! has so-far sold off half of its stake in Alibaba and used the deal to return about $3 billion in cash to shareholders. Investors and analysts continue to use Yahoo!'s remaining 20% interest in Alibaba and a 33% stake in Yahoo! Japan as a key component of the company's overall valuation.

For instance, Yahoo! shares are up over 75% in the past year, partly on optimism new CEO Marissa Mayer can resuscitate the company's core business amid competition from Facebook ( FB) and Twitter. More importantly, some analysts now value Alibaba at up to $70 billion, as it moves toward an IPO. A 20% stake in Alibaba at that valuation represents about half of Yahoo!'s current market capitalization.

A weakening Japanese yen has also supported Loeb's Yahoo! investment and his macroeconomic views. It's no surprise the hedge funder has targeted Sony as his next big turnaround investment.

Earlier in May, Loeb disclosed a 6.5% stake in Sony and a plan to spin off the company's entertainment business in a stock offering. The unit includes movie studios and music labels. Loeb is not advocating Sony sell the cash gushing entertainment business outright, nor is he asking the company to cede control.

In a letter to Sony's board, Loeb proposes the company take public a 15%-to-20% stake in Sony Entertainment.

What would a spinoff of a minority stake in Sony Entertainment accomplish?

First, stock investors might give Sony Entertainment a more full valuation than the unit currently garners as a piece of Sony's conglomerate structure. That's especially the case as shares of media and entertainment behemoths Disney ( DIS), Time Warner ( TWX) and CBS ( CBS) continue to rise to new post-crisis highs.

As with Yahoo!, Sony might gain a new support to its valuation as investors focus on the sum of the company's parts. While Sony has gained over 100% year-to-date and about 10% since Loeb disclosed his proposal, the company's shares remain just half of pre-crisis levels.

Specifically, Loeb argues Sony should offer subscription rights to Sony Entertainment stock to current shareholders rather than a standard IPO. Third Point is willing to backstop the up to $2 billion stock offering, Loeb said in his letter to Sony's board of directors.

A Sony Entertainment share sale will also raise capital for the electronics giant, as it seeks to turn around its core electronics business. The company recently returned to profitability after a record $5.7 billion 2012 loss.

It wasn't so long ago discussion on Sony centered on the company's debt of over 1 trillion Japanese yen and not its turnaround prospects.

According to Loeb, a spinoff of Sony Entertainment will not only bring much needed capital to its money-losing electronics division, it could also pare the parent company's overall debt.

"These transactions would reduce leverage at the parent company and provide much needed growth capital for Sony Electronics," Loeb wrote, in the letter.

With the support of a Sony Entertainment spinoff, Loeb believes there is the prospect Sony can retool it's electronics business, which has lost a brand premium to Samsung and LG and isn't as advanced in smartphones and tablets as Apple ( AAPL).

In particular, Loeb sees reason to believe Sony can revive its television business, while developing its better-performing electronics products like its PlayStation console, Xperia smartphones and cameras.

"Of particular regret is Sony's venerable TV business which has sadly languished as a loss leader for the company for nearly a decade, but now appears poised to return to profitability in coming quarters," Loeb wrote.

" We believe Sony Electronics is a source of considerable and underappreciated value," the activist concluded. Loeb calculated Sony Electronics current valuation at about $8 billion, or a little over a third of the company's overall market cap as of Friday's close.

Using Yahoo! as a litmus test for Loeb's proposed turnaround of Sony is important given the company's tremendous operational challenges.

In an excellent 2011 analysis, Bloomberg highlighted a quagmire at Sony worthy of a Harvard Business School case study that almost seemed intractable until Loeb's moonshot.

While Sony's TV business is a loss leader, it remains a key source of revenue that is necessary for the development of higher margin gaming and mobile products.

A sale or spinoff of Sony's TV business, the Bloomberg analysis showed, would eliminate the revenue needed to drive R&D and marketing of higher margin products. Given Sony's debt levels, it's no surprise the company has shown no inclination to exit the TV business.

Sony appears drawn to a spinoff of Sony Entertainment and said on Tuesday it is evaluating Loeb's proposal.

While Loeb is surely investing in Sony as an electronics sector turnaround and Yahoo! for its prospects of regaining relevance on the Web, his investments hinge on the belief that split off businesses can support the valuations and balance sheets of both companies.

If there is anything that should give Sony investors' confidence Loeb can be the company's savior it is the strong performance of Yahoo! shares even before CEO Marissa Mayer has made an impact on the company's earnings.

-- Written by Antoine Gara

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