Possibly taking a cue from Dan Loeb, Atul Goyal, CFA of Jefferies writes an open letter to CEO and Sony Corporation (NYSE:SNE) (TYO:6758)'s BoD. He encourages the company to spinoff the electronics business. The letter focuses on 3 things.
In Goyal's words: Firstly we compliment CEO Kaz Hirai for his involvement and dedication to Sony's cause. Secondly, re the content spin-off proposal we request the board to consider the short-term impact and 5-point long-term trade-offs. Finally, we propose a tweak, to spin off Electronics instead of Content to salvage Sony's value.
Compliments to CEO Kaz Hirai and Sony Corporation (NYSE:SNE) (TYO:6758)'s Board.
We would like to compliment CEO Hirai for his dedication to speed up decision making, ensuring closer collaboration across divisions and in honestly acknowledging the challenges in Electronics business. We also compliment the board in fulfilling its duties by seriously taking on investor proposals.
Sony Corporation (NYSE:SNE) (TYO:6758) content spin-off: Short term gains vs. Long term trade-offs. Five points.
In the short term, Sony's stock will fain from a content-spin off. But we request the board to also consider long-term trade offs from this spin-off: (1) Sony would lose access to 80% of cash flow of Sony Content and taxation inefficiencies would increase. (2) Content business, which needs reinvestment to grow profitably, will starve while funds get redirected to the cash-sucking Electronics business. (3) After content spin-off, it would lose share of profits and will be left with the structurally weakest bits. (4) A spin-off of another profitable venture, SFH, does not inspire confidence (5) if debt (at 0.86%) is really burdensome (vs. CoE of 6-10%) and if its CE peers are only Sharp and Panasonic?
A tweak to the original proposal - spin-off electronics instead of content.
Five points. (1) Once listed, with the support of investors who believe Electronics is source of "underappreciated value", it will enable investors to use listed value in sum-of-parts; (2) a stake in listed Electronics entity could be used to reward management and drive performance; (3) management could make SG&A far more productive; (4) liquidity from an Electronics spin-off could be used to fund expansion in the Content business; (5) reduction in exposure to the volatile Electronics business could lead to rerating in Sony Corp (which would retain 100% control over profits and cash flow of Sony Content).