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Loeb presses Sony on IPO, blasts film flops

Bloomberg

Sony Corp. investor Daniel Loeb, pressing the case for an initial public offering of the company’s entertainment unit, has leveled new criticism at management of the company’s film and television studio.

Sony Pictures Entertainment “is characterized by a complete lack of accountability and poor financial controls” under U.S. Chief Executive Officer Michael Lynton and Amy Pascal, the studio co-chairwoman, Loeb’s Third Point LLC said Monday in its quarterly letter to investors.

Loeb’s latest salvo comes as the Tokyo-based company prepares to report first-quarter results this week. While Chief Executive Officer Kazuo Hirai has improved the struggling electronics business, Sony does not sufficiently address entertainment issues such as the movie flops “After Earth” and “White House Down” with investors, Third Point said.

“Given entertainment’s perpetual underperformance, perhaps Sony’s reluctance to discuss it candidly stems from (understandable) embarrassment,” Loeb wrote in the letter.

Sony’s board has agreed to consider Loeb’s proposal to sell part of the entertainment unit in an IPO. Hirai has stressed the importance of ties between electronics and the entertainment business.

“Sony is focused on creating shareholder value by executing on our plan to revitalize and grow the electronics business, while further strengthening the entertainment and financial services businesses, which generate stable profit,” Jim Kennedy, a New York-based spokesman for Sony, said in an emailed statement.

Third Point, based in New York, said in May that it held a stake in Sony valued at $1.1 billion, and since then has been pushing Loeb’s plan. An independent board and shareholders will lead to more disciplined and accountable management at Sony’s Culver City, California-based movie and television studio, Loeb has said.

Third Point owned 70 million shares through direct ownership and cash-settled swaps as of mid-June, and is interested in representation on Sony’s board, it said in a June 17 letter to Hirai. The holding represents about 6.9 percent of outstanding shares, up from 64 million shares in May.

Music and film-studio earnings before taxes, interest, depreciation and amortization at Sony trail industry peers, according to Loeb. In Monday’s letter, he compared “White House Down” and “After Earth” to two epic Hollywood busts, “Waterworld” and “Ishtar.” In light of the results, he said Third Point was surprised that Hirai told reporters entertainment was “doing just fine.”

Sony managers devote more attention to electronics than entertainment, Third Point said.

“Unlike electronics, entertainment remains poorly managed, with a famously bloated corporate structure, generous perk packages, high salaries for underperforming senior executives and marketing budgets that do not seem to be in line with any sense of return on capital invested,” Loeb said in the letter.

“White House Down,” an action movie with Channing Tatum and Jamie Fox, was made for $150 million and garnered $70.7 million in U.S. ticket sales, according to researcher Box Office Mojo. “After Earth,” with a production budget of $130 million, has generated $60 million in U.S. sales. Production budgets do not include marketing spending. Studios typically split box-office receipts with theaters.

Loeb was kinder to Hirai’s effort to revive Sony hardware divisions making smartphones, game consoles and other consumer gear. Strong momentum in the smartphone business has been accompanied by a perfectly executed introduction of the PlayStation 4, Third Point’s letter said.

The game and mobile-products divisions are now poised to join the devices business as meaningful profit contributors, according to the hedge fund.

“Drastic — rather than incremental — action is required” to increase Sony’s overall profitability, Loeb said. A partial listing of the entertainment unit should increase profit at Sony and provide capital to invest in the electronics unit, he said.