Dan Loeb pushes a hidden Sony jewel into the light by separating its chips business

Source:Global Times Published: 2019/6/17 18:08:39

Daniel Loeb has pushed a hidden Sony jewel into the spotlight. The activist behind the hedge fund Third Point wants the $60 billion Japanese conglomerate to separate its chips business, among other things. It is a sensible step toward simplifying the sprawl.  

The company, led by Kenichiro Yoshida, is known for its PlayStation video games console, plus an expanding entertainment empire of box office hits like Venom, and a music catalogue that runs from Beyoncé to the Backstreet Boys. Yet the Tokyo-based outfit has also quietly built up a semiconductors business. It is now the world's top maker of image sensor chips, used mostly in smartphone cameras. In the financial year that ended in March, the unit accounted for 16 percent of Sony's total operating profit of roughly $8 billion.

This is what Loeb has set his sights on. His fund, which has invested $1.5 billion in Sony, is calling for Yoshida to extract the chips business and set it up as a standalone company. The rebranded Sony Technologies could be worth $35 billion within five years, the activist argues.

Splitting the pure-play chips business from the media group makes sense. Sony's shares trade at just 12 times forward earnings, Refintiv data shows, trailing behind rival video games group Nintendo's 18 times, and well below established entertainment groups like Walt Disney and Vincent Bolloré's Vivendi. Separating semiconductors, which require significant investment, would leave Sony room to spend elsewhere.

There are valid reasons for Yoshida to hold back, though. For one, some 90 percent of Sony's chips revenue comes from smartphones, Macquarie analysts reckon. That makes the business vulnerable as a tech Cold War between Washington and Beijing escalates. Huawei, the Chinese titan that has been banned from working with US tech firms, is a major Sony customer, for instance. Analysts at Jefferies recently slashed their operating profit forecast for the Japanese chips unit by 45 percent as a result.

The longer-term outlook looks shinier. Global smartphone sales are falling, but the number of cameras per phone is going up. Sony will also benefit as automakers and consumers embrace autonomous driving, which will require cars to be equipped with ever more image sensors.

Thursday's letter will draw attention to a unit investors give Sony little credit for. Yoshida can, at least, consider Loeb's big picture.  

The author is Robyn Mak, a Reuters Breakingviews columnist. The article was first published on Reuters Breakingviews. bizopinion@globaltimes.com.cn

Posted in: INSIDER'S EYE

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