Sony Corp (ADR) (NYSE:SNE) saw some great movement back in 2013 when activist investor Dan Loeb delivered a hand-written letter to CEO Kazuo Hirai. In that letter, Loeb, petitioned for Sony to spin off its entertainment division, which includes movies, television and music. Loeb believed the move would increase the value of Sony stock and reward shareholders … and another weak quarter for the division makes that memory all the more painful.
Loeb has since sold his stake, after being the largest shareholder with 6% of shares, but new rumors see Sony selling off part of the unit. SNE stock is ready to roll in 2017 if this move finally comes into play.
The New York Post reports that Sony is listening to pitches from interested parties in the Sony Entertainment division. Rumors see CBS Corporation (NYSE:CBS), a Chinese media company, or a technology company like Apple Inc. (NASDAQ:AAPL) or Facebook Inc (NASDAQ:FB) acquiring this asset from Sony.
An outright sale of the division that includes movies and television would differ from Loeb’s original plan, which called for the entertainment unit going public and including Sony Music.
On Thursday, Sony reported a weak fiscal third quarter due to the movies division. SNE lost $913 million in the pictures division — thanks to a $962 million write-down — bringing Q3 profits down to $169 million. Even without the one time event, the division was very weak compared to last year’s third quarter, which thrived thanks to the James Bond installment Spectre.
Why a Sony Entertainment Sale Could Still Work
Those results aside, though, the Sony Entertainment division is incredibly valuable in today’s content monetization world. The company creates movies and television series — and naturally could produce more — that would fit well for many acquiring companies. Within Sony, this division often is buried under a focus on video games, televisions, and smartphone technology.
SNE has struggled to produce high box-office gross from its movie division, but that could change with its 2017 lineup. This year, the studio will release sequels to movies like Trainspotting and Smurfs. The studio will also release a remake of Jumanji, with a prominent Dec. 22 opening date. Along with the Smurfs: The Lost Village, Sony is betting on its animated offerings with other titles The Emoji Movie and The Star also coming in 2017.
While some reports say Sony is waiting to sell the division until it sees how strong the opening of The Emoji Movie is, I have to believe that they are waiting for another small movie coming out on July 7. You might have heard of it. It’s called Spider-Man: Homecoming. Sony has had better luck in terms of overall box office revenue and market share in years when a Spider-Man movie has been released.
This could be the perfect time to monetize the entertainment division for the company and reward owners of SNE stock.
In 2016, Sony held only an 8.3% market share of the U.S. box office with $943.5 million grossed from 36 movies. This was the highest number of movies released among the main studios. Sony ranked well behind Walt Disney Co (NYSE:DIS), Time Warner Inc. (NYSE:TWX), NBC/Universal and News Corp’s (NASDAQ:NWSA) Fox, who all grossed more than $1.5 billion domestically during the year. Only two Sony movies (Ghostbusters and Angry Birds) grossed more than $100 million domestically.
This has been a common theme, and also one of the reasons why the entertainment division is so unpredictable for a large technology company like Sony. In 2015, the studio barely cleared $1 billion thanks to two decent-performing movies in Spectre and Hotel Transylvania 2.
A Big Lineup Ahead
As mentioned above, releasing a Spider-Man movie has been a good thing for SNE and could lift Sony stock soon.
Back in 2014, Sony finished fourth with a market share of 12% and $1.3 billion domestically. The Amazing Spider-Man 2 grossed $202.9 million domestically and another $506.1 million internationally. In 2012, Sony ranked second at the box office with a 16.5% market share and $1.8 billion in domestic box office revenue. Skyfall and The Amazing Spider-Man led the way with $291 million and $262 million, respectively. The Amazing Spider-Man grossed an additional $496 million in international markets.
Along with a strong 2017 planned, Sony’s movie division is also releasing additional Spider-Man movies, Bad Boys 3, Bad Boys 4, Hotel Transylvania 3, Goosebumps 2, Barbie and more animated movies. Other intellectual properties owned include Charlie’s Angels, 21 Jump Street, Ghostbusters, The Girl With the Dragon Tattoo and Men in Black.
The time for SNE to sell this asset could absolutely be now as it has a decent pipeline, can capitalize on the Spider-Man results, and may full well know the best is behind it. The company lost the rights to the James Bond movies and has only released two of its top 10 grossing movies since 2010 (Skyfall and The Amazing Spider-Man).
Sony Entertainment has more to offer a new owner than just movies. The division also produces and distributes television shows, and has a handful of media networks, with a strong presence internationally. The division’s global footprint covers 178 countries and more than 1.4 billion subscribers.
Hit television shows under the Sony umbrella include Better Call Saul, Jeopardy, Blackish and Shark Tank. The television division has really grown, and could be the biggest reason this asset is undervalued, and sets up a big win for Sony stock. In the 2015-16 season, Sony had 33 series on the air. That is a sharp increase from the 15 a decade ago in 2005-06.
Bottom Line for Sony Stock
Add it all up and you have a top five movie studio, an increasing producer of original content for numerous channels, owner of strong intellectual property and syndicated programs, and an international television channel owner. Those assets will make Sony’s Entertainment arm incredibly valuable to CBS, a Chinese media company or whoever is currently sniffing around.
Sony may be hesitant to let go of the entertainment arm that has helped to make up for weakness in the electronics markets in years past. Thursday’s Q3, however, showed just how much trouble the movie business is in.
The company should capitalize on its upcoming slate and reward Sony stock holders shareholders with a sale of the division.
As of this writing, Chris Katje did not hold a position in any of the aforementioned securities.