Despite Sony Corp.’s rejection of his proposal to spin off as much as 20% of the conglom’s entertainment assets, Third Point Capital CEO Daniel Loeb said he was actually “pleased with the outcome” of his hedge fund’s efforts.
In an exclusive interview, Loeb, whose Third Point owns an estimated 7% of Sony, struck a much more conciliatory tone toward the Japanese electronics giant than he’s demonstrated in recent weeks. He praised Sony CEO Kazuo Hirai’s letter to him, calling it “thoughtfully written and detailed in its discussion of profitability and transparency. There was a lot there for shareholders to hang their hats on.”
Loeb said that the letter had to be viewed in the context of what Third Point was aiming for: greater transparency, accountability and profitability, as well as access to management.
Surprisingly, Loeb also said that he found some commonality with George Clooney, even though the actor last week told Variety’s sister publication Deadline that Loeb “knows nothing about our business.” In an investor letter, Loeb had criticized the performance of Sony Pictures Entertainment chairman and CEO Michael Lynton and co-chair Amy Pascal.
“Notwithstanding the fact that the media likes to create a stir, I admire Mr. Clooney’s passion for Sony and his loyalty to Sony and his friends there,” said Loeb, suggesting that he and Clooney share a “common goal” in that “a more disciplined company with better allocation of capital means less money spent on bureaucracy and more investment in motion pictures. We are all for intelligent investment in creative content. I believe our interests are aligned in a way he probably doesn’t realize.”
Some wonder what next steps, if any, Loeb might take with Sony given that Third Point was initially rebuffed by Yahoo management only to press his case to the point where the CEO was replaced and the company went through a major overhaul.
By contrast, in the case of Sony, Loeb indicated that he would be watching to see how things play out, rather than pursue such a structural overhaul.
“What we would expect is more disclosure and a more detailed plan for how they will improve profitability in their entertainment division, including specific profitability targets,” he said. “We will monitor their performance in coming quarters and revisit Sony’s progress around the time of next year’s annual meeting.” He said that Third Point will “continue to be highly engaged, maintain a dialogue with management, and expect to offer further suggestions to increase shareholder value.”
Last week, in a letter to investors, Loeb cited Sony’s box office misfires of “After Earth” and “White House Down” as indicative of dysfunction at the company.
But on Tuesday, Loeb declined to talk about the performance of the studio’s most recent release “Smurfs 2” (which had a disappointing debut) or other films. “We’re really not focused on individual movies or their slate. I know I mentioned that in the last letter, but at this point it is more productive to support management and the goals advanced by Mr. Hirai in his letter.”
He added, “It is probably unfair to focus on one or two bad movies, just in the way that Third Point from time to time can have one or two bad months or a bad year. What is important is the overall profitability and margins over a period of time.”
He said that Third Point succeeded in getting management to focus on the entertainment business, and also having the Wall Street community pay more attention to those assets, noting that analyst price targets have increased by an average 25% since Third Point revealed its stake in Sony.
Loeb noted that he was pleased with Hirai’s statement that Sony has “instituted an even more exacting ‘green light’ process for film production, focusing more intensively on overall slate profitability as well as per film returns on investment.”
Hirai’s acknowledgement that “our margins should be higher” is a signal that Sony recognizes the need to improve profitability. “The fact that they said that is a big step,” Loeb said. “Before, if you confronted them on peer group margins, they would say those were apples to oranges comparisons.”
Loeb said he was much more satisfied with Sony’s response than that of Yahoo. “Only three months into our investment, Yahoo had completely rebuffed us. The chairman hung up on me in a phone conversation…This is a sharp contrast. The only thing they rebuffed was the spinoff proposal. They took our suggestions seriously and acted on them.”
Asked about Pascal and Lynton, Loeb said, “We support Hirai, and to the extent that he supports his management team and they can meet the board’s initiatives around transparency and profit margin improvement, I see no reason [the current executives] cannot do that. It is a decision for Mr. Hirai to make.”
Third Point is a minority stakeholder in Variety Media, along with majority owner Penske Media Corp., which also owns Deadline.