Sony Corporation (NYSE:SNE) (TYO:6758)’s has earlier stated that the board is considering Dan Loeb’s proposal for Content spin off. Overnight, Shira Ovide on the WSJ reported that Sony is working with banks regarding the proposal.
Atul Goyal of Jefferies believes (in a fairly obviously remark that) “the board is doing the right thing by looking at available options”. Atul believes spin-off of its content business is good for the short-term stock price action, but there are long-term trade-offs involved. Nonetheless, Jefferies values the stock at ¥2,630 and reiterate its buy. Shares of Sony trading on the Tokyo Exchange closed at 2,049 yen in yesterday’s trading session, up 2.1 percent.
Media reports say that Sony is working with banks regarding Daniel Loeb’s proposals for the company. This comes in the wake of an earlier Nikkei report last week which stated “Sony Board To Hear Proposal For Entertainment Spinoff”. This shows that Sony is considering its options with an open mindset, as it should, and probably working with banks to understand potential valuation. Interestingly, the WSJ also ran an article overnight that states “Sony Corporation (NYSE:SNE) (TYO:6758) CEO Defends Against Breakup” on stage at the D: All Things Digital technology conference. Jefferies notes that the break-up is different from spin-off.
Sony Corporation (NYSE:SNE) (TYO:6758)’s board needs to prudently consider a proposal from one of its largest shareholders. It would be irresponsible not to do so, in Jefferies’ opinion. But considering does not mean accepting and executing on that proposal. Amongst other things, Sony’s board needs to consider these factors: (A) How a spin-off affects (weakens / strengthens) Sony’s overall position in the longer-term as well as in the near-term (and there are 3 critical aspects) and (B) Possible value of the spin-off and potential impact on the group.
Jefferies view Of Sony:
As stated in the initiation report (where Jefferies rated Sony a BUY) They value the C (content) business as the most important part of the company at $16.5b (Movies $11b; Music $5.5b). They believe first part of the proposal — ‘to spin off 10-20%’ — helps the stock price in the short term. The second part of the proposal to give the money raised from this listing to Electronics, does not add any value to the group. Sony Corporation (NYSE:SNE) (TYO:6758), needs an exit strategy to focus on fewer products.
Hope in SG&A within ELECTRONICS: Sony Corporation (NYSE:SNE) (TYO:6758)’s opportunity lies in making it lean, in saving unproductive expenditure (a $15b annual SG&A spend at 25.6% of sales is the most obvious example of that and there are more). This $15b spend compares with $10b SG&A spend by Apple (which has a 20x higher market cap than Sony); compares with c. $9b of Sony’s cumulative net profits for last 22 years. And the figure of 25.6% of sales stands in stark contrast to its electronics peers spending 15-18% on their SG&A. That only means there is low-hanging fruit, if Sony knows how to pluck them.
Jefferies uses a sum of parts based target price of ¥2,630/sh. Total value in US$ terms will be $30.8b based on value of iCE ++. They value i (Insurance) at $4.5b, C (content) at $16.5b, E (Electronics) at 0, Others (stake in Olympus + PS brand) at $3.1b and Value of Savings (at 50% prob) at $6.7b).