Sony Downplays Third Point's Breakup Pitch

NEW YORK ( TheStreet) - Change at Sony ( SNE) may take time, as the company tries to revive its competitiveness in the fast-moving electronics business.

Sony continues to downplay a breakup proposal that activist hedge fund investor Dan Loeb of Third Point Capital has proposed for the struggling electronics and entertainment giant. At the company's annual shareholder meeting in Tokyo, Sony CEO Kazuo Hirai said the company's media division, Sony Entertainment, is not for sale.

Hirai also indicated the company will take its time in assessing whether to spin off the business, as Loeb has proposed.

"The entertainment business plays an important role in Sony's future growth," Hirai said at the meeting. "This proposal strikes at the heart of what kind of company Sony ultimately will become in the future. We intend to take our time in discussing it."

In May, Loeb disclosed a 6.5% stake in Sony and a proposal to take public a 15%-to-20% stake in Sony Entertainment 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.

The hedge fund manager has offered to provide up to a $2 billion financial backstop to a Sony Entertainment spinoff and gives the unit a valuation of about $8 billion, or a little over a third of the company's overall market capitalization.

On Tuesday, Third Point disclosed it had bought 5 million additional Sony shares, putting its overall stake in the company to about $1.4 billion or nearly 7% of the company's outstanding shares.

Media reports indicate Sony has hired bankers to weigh Third Point's proposals.

For now, Sony CEO Hirai's comments indicate Third Point's activist efforts may take time to bear fruit, if ever. In recent years, the hedge fund has successfully focused its efforts towards revitalizing Yahoo! ( YHOO).

Many components of Third Point's plan for Sony resemble activist proposals the hedge fund enacted at Yahoo.

At Sony and Yahoo!, Third Point seeks to use divestitures of stakes in non-core businesses to realize a fuller market valuation of both companies. Sony and Yahoo!, meanwhile, have assets that are highly exposed to the Japanese Yen and Asian markets.

Currently, Third Point believes the Bank of Japan's loose monetary policy and a weakening of the yen will lift stocks in the region.

Sony, however, faces challenges that go far beyond the stagnation and mismanagement the activist sought to undo at Yahoo!. The company has over one trillion yen in outstanding debt and its electronics unit only recently returned to profitability after years of record losses.

Some analysts say Loeb and Third Point have it backwards with Sony. Atul Goyal, a Jefferies analyst, said earlier in June Sony should consider a spinoff of its struggling electronics business and not its successful entertainment unit.

Such scenarios will test the skill of Sony's recently reconstituted board of directors and its CEO Hirai.

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

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.

A sale or spinoff of Sony's TV business, the Bloomberg analysis showed, would eliminate 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 its lynchpin electronics business.

Loeb sees a sale of a stake in Sony Entertainment as bringing much needed cash to the electronics business, while also potentially lifting the company's overall valuation. According to Loeb, a spinoff of Sony Entertainment will not only bring cash 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.

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, he 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.

Sony shares were trading higher by over 1.5% in pre-market trading to $20.80. Shares in the electronics giant have gained over 80% year-to-date on improving earnings, a yen weakening and Loeb's activist efforts.

-- Written by Antoine Gara

More from Mergers and Acquisitions

Could Spotify Be Next on Amazon's Wish List?

Could Spotify Be Next on Amazon's Wish List?

Sprint, T-Mobile Might Have to Do More Than Make Promises to Get Deal Approved

Sprint, T-Mobile Might Have to Do More Than Make Promises to Get Deal Approved

Xerox Received Interest From HPQ Before Fuji Deal: Sources

Xerox Received Interest From HPQ Before Fuji Deal: Sources

Divestitures at Newell Expected in Weeks: Wells Fargo

Divestitures at Newell Expected in Weeks: Wells Fargo

In Biopharma M&A, 'Where There's Real Innovation There's Someone Willing to Pay'

In Biopharma M&A, 'Where There's Real Innovation There's Someone Willing to Pay'