Sony’s valuation likely to entice activist investors unless business rationalization achieved

Source:Global Times Published: 2019/1/1 15:39:12

The pressure is on for Kenichiro Yoshida to deliver a bold performance in 2019. Since taking the reins in April, the Sony boss has boosted earnings at Japan's $61 billion movies-to-video-games group. But the long-time company veteran needs to shed a loss-making handset unit and spin off the chip business, among other things.

Any reluctance to move quickly will see hedge funds make a cameo in Sony's remake. Yoshida's predecessor sold the laptops business, slashed jobs, streamlined businesses and ended a streak of heavy losses. Now Sony's cash-cow PlayStation division, as well as its music and movies units are powering sales and earnings.

The Tokyo-based company expects a record annual operating profit of 870 billion yen, or $7.8 billion, for the current fiscal year. Shareholders should be pleased, but far from impressed. Since Yoshida took over, Sony has delivered a 6 percent total return, including reinvested dividends, compared to negative 11 percent at Japan's benchmark Topix index, as of December 20. Even so, the stock trades at an unglamorous 12 times forward earnings, less than Sony's own two-year average and well below the 16 times multiple commanded by video games rival Nintendo.

One way to fix the drag would be to make a quick exit from smartphones. Sony is scaling down that business and writing off some assets, yet it remains committed to hitting a 2020 profit target for the unit. Another daring and welcome move would be to spin off the fast-growing semiconductor division, which has questionable strategic value next to PlayStation money-makers like "God of War" and a music catalogue that spans artists from Beyonce to Queen. Yoshida would be foolish to hold back.

If left unaddressed, the valuation gap could invite a new star. Sony doesn't have the protection of a single large shareholder. Meanwhile, activist investors like Paul Singer's Elliott and Hong Kong-based Oasis are taking more interest in underperforming Japanese companies as the country takes a more shareholder-friendly turn. Loud voices have already been heard at Toshiba, Olympus, and Seven & i. Hedge funds will closely watch Yoshida's next act.

The author is Robyn Mak, a Reuters Breakingviews columnist. The article was first published on Reuters Breakingviews.

Posted in: INSIDER'S EYE

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