Sony (SNE) shares have gained roughly 16% since May 14, when activist investor Daniel Loeb first approached CEO Kazuo Hirai about spinning off its profitable movie and music division so that it could focus on its electronics business. That’s just part of a year-to-date run that has helped SNE nearly double — a move also fueled by a depreciation in the yen.
Loeb believes a spinoff could add another 38% to the value of Sony’s stock. Loeb himself is prepared to invest an additional $2 billion in a warrant deal that would see existing shareholders buy 15% to 20% of Sony Entertainment, allowing the company to move some debt off its balance sheet. Unfortunately, Hirai believes that Sony is both hardware (smartphones, PlayStation and cameras) and content, and both must remain under one roof. Therefore, we have a stalemate at the moment.
Can Loeb win? With 6.6% of the shares and its largest shareholder, the board has an obligation to listen, but beyond that, I don’t believe it has to placate Mr. Loeb. If he doesn’t like the strategic plan Hirai has outlined for the company, Loeb can sell his shares at a tremendous profit.
In this situation, it’s really hard to know whether Sony is better off with the entertainment division or without it. Its most recent fiscal year shows some signs of improvement (best operating profit since fiscal 2007), but its electronics businesses still are having a difficult time growing profitably.
At this point, if Sony doesn’t go ahead with a spinoff and earnings don’t improve, I see few catalysts to keep its stock moving higher.
Viacom (VIAB) always has struck me as the cheap cousin to CBS (CBS). So it’s not surprising that the Delaware Supreme Court ruled Tuesday that Viacom must pay $299 million in earn-outs it owes the former owners of Harmonix, the creators of Rock Band and Guitar Hero. It isn’t a new revelation, but something that’s been in the courts since 2009.
What’s funny is, while Viacom is loathe to pay out its legal obligations, it apparently is glad to overpay its CEO, Philippe Dauman.
Viacom’s stock is up 40% year-to-date through July 16. During the past five years, VIAB has achieved an annualized return of 21%. Investors love its stock; Sanford C. Bernstein analyst Todd Juenger, not so much. In a recent report, Juenger explained that his firm upgraded Viacom from “underperform” to “market-perform” and raised its price target to $73 — not so much because it was doing well, but rather to reflect the fact that the market refuses to see the negatives surround VIAB.
Long-term, Juenger sees its Nickelodeon and MTV franchises disappearing. He goes on to suggest that Viacom’s profits haven’t grown since 2011, yet its stock has increased by 79% thanks to buybacks and the expansion of its valuation multiple. In other words, its stock is up because of smoke and mirrors.
While Juenger doesn’t see the bad news being reflected until well into fiscal 2014, I see it happening much sooner.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.