Third Point's Daniel Loeb Sends New

Third Point leader argues split would allow more flexibility and capital for conglom

Third Point CEO Daniel Loeb has sent a second letter to Sony CEO Kazuo Hirai, raising its stake in the electronics giant and reiterating a proposal to spinoff as much as 20% of the company’s entertainment assets and to argue that a separate showbiz entity would boost efficiency and accountability.

In the latest letter sent Monday, Loeb proposes that Hirai should serve as chairman of both boards of directors, in what he calls a “semi-independent governance structure.” But he says that having a separate board of directors for Sony Entertainment would hold “management accountable by establishing goals for growth while setting compensation tied to value creation using stock and options.”

He asked Hirai for the opportunity to talk to the Sony board of directors or its investment bankers to talk about the idea, noting the support it has garnered among shareholders, and Loeb again asked for board representation.

Loeb also said that Third Point has increased its stake in Sony to 70 million shares valued at $1.4 billion, via 46 million shares of ordinary stock and economic exposure to 24 million shares through cash-settled swaps. Last month, Third Point said it held 64 million shares, or about $1.1 billion. Loeb said that the additional stake was a “sign of our increased confidence ” in the company’s direction under Hirai. Third Point’s stake is estimated at about 6.5% to 7%.

He did get more specific about past criticism that the entertainment assets were not as efficient and nimble as it could be.

“A capital shortfall has prevented Sony from taking advantage of attractive acquisition opportunities; instead, the Company has resorted to joint ventures and costly loans to engage in strategic transactions like those in music publishing [i.e. EMI],” he wrote. “Our research has confirmed media reports depicting Entertainment as lacking the discipline an accountability that exist at many of its competitors.” He added that the spinoff would be strengthened by transparency from public reporting, regular evaluation by analysts and a board with “strongly aligned incentives.”

A spokeswoman for Third Point said the firm had no comment. A spokesman for Sony did not immediately respond to a request for comment. Studio executives have argued that the company has been engaged in cost cutting, scaling back on its releases, while building up its TV division and expanding the reach of its international cable channels.

The letter also seemed to push back against any criticism that an entertainment spinoff would diminish the ability to create more cooperation between entertainment software and hardware, as Loeb noted that the “most valuable untapped synergies” are still in the studio and music divisions yet after decades as one company they still remain untapped.

“We understand past Sony management teams have considered a complete spin-off of Entertainment, but concluded that the potential for synergies outweighed the obvious value that would result,” Loeb wrote. “We respectfully disagree with any suggestion that listing a minority stake in the Entertainment division would curtail opportunities for cooperation. While we trust management’s judgment that this theoretical opportunity is ripe, it remains an unfilled aspiration twenty-four years after the acquisition of Columbia Pictures. Shareholders should not have to wait any longer.”

The letter bolstered arguments that Third Point made in an original proposal that Loeb personally delivered in a letter to Hirai last month, calling for a spinoff of 15% to 20% of Sony Entertainment. Hirai later announced that the board of directors would conduct a study of the potential impact of such a move, enlisting two investment banks for the review. The spinoff would include Sony Pictures Entertainment and the music division.

Third Point, which offered to backstop any offering, also says that a spinoff would allow the parent company the focus it needs to revive its electronics business.

Hirai said at a conference last month in Rancho Palos Verdes, Calif., that it was premature to say whether the board would support or reject a spinoff. The entertainment assets have boosted the company at a time when its TV manufacturing and other electronics have sagged. The company’s annual meeting is Thursday in Tokyo.

Third Point is a minority stakeholder in Variety Media, along with majority owner Penske Media Corp.

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