Hedge fund activist Daniel Loeb is taking on Sony Corporation (ADR) (NYSE:SNE), urging the company to break itself in two. That’s a stiff request of a Japanese-based conglomerate. And, the split doesn’t necessarily make strategic sense.
Media or Electronics
Part of the division’s problem stems back to an aggressive move into televisions just as prices started to drop. That shift and the 2007 to 2009 recession have left the company’s top line flat, at best. And earnings have been non-existent, with red ink flowing in each of the last few years. Although the weak yen led to a profitable first quarter, the underlying business is still relatively weak.
However, hiding behind this division is a an entertainment arm that, According to Bloomberg, accounted for almost 50% of the company’s operating income last year. The company lays claim to such notable movie franchises as Men in Black and Spider Man, the television show The Client List, and musician Bruce Springsteen.
There’s clearly a great deal of value in the company’s media library, particularly as companies from Netflix to Amazon to Hulu look to bulk up their streaming offerings. That’s increasingly included exclusive deals, such as the one between Netflix and The Walt Disney Company (NYSE:DIS) for children’s content.
Shifting Gears
Although Loeb started out looking to liberate the value of Sony Corporation (ADR) (NYSE:SNE)’s media arm, he’s now praising the turnaround at the electronics division and panning the media group as “unaccountable.” Recent movie misses, including White House Down and After Earth, don’t help Sony Corporation (ADR) (NYSE:SNE)’s side at all. High priced movie flops, however, are part of the media game.
For example, The Walt Disney Company (NYSE:DIS) missed the mark last year with John Carter and followed that up with this year’s Lone Ranger. It wrote off $200 million for the first miss with estimates of a similarly large write off for the second.
Despite these mistakes, The Walt Disney Company (NYSE:DIS) remains a leader in the media world. In fact, even with the John Carter write off, The Walt Disney Company (NYSE:DIS)’s sales and earnings have moved higher each year since the 2007 to 2009 recession. With an around 20 price to earnings ratio, growth investors should find The Walt Disney Company (NYSE:DIS) appealing.
Synergies
The owner of amusement parks, cruise ships, and television and cable channels can cross pollinate in ways that Sony can’t. For example, The Walt Disney Company (NYSE:DIS)’s movies usually make an appearance at the company’s parks. So there are more reasons to like Disney than a strong media arm. That said, synergies come in many forms.
For example, two disparate businesses can be run using the same accounting division. And, when one business isn’t doing well, a sister business can help fund turnaround efforts. That’s what’s been going on at Sony. And that offers notable long-term value that often gets overlooked by investors. Particularly those seeking quick gains, like hedge funds.
Soda or Snacks
A similar fight is taking place at PepsiCo, Inc. (NYSE:PEP) with Nelson Peltz, manager of the Trian hedge fund. He is calling for the company to buy snack maker Mondelez International and then spin off its slower growth drinks business. Even if the company doesn’t buy Modelez, Peltz still wants to see beverages jettisoned.
Mondelez, which recently separated from Kraft, hasn’t lived up to the growth expectations set up prior to the split. Joining that company with PepsiCo, Inc. (NYSE:PEP)’s Frito Lay arm would simply add a struggling company in the same line of business. Switching a snack turnaround for a beverage turnaround doesn’t seem like it would add much value. And what happens if Frito Lay’s growth stalls?
Keeping the beverage arm provides diversification that Monelez won’t. So far, PepsiCo is resisting the urge to merge and/or split. That’s good for investors. Pepsi’s top line fell about 1.5% last year, with earnings falling nearly 3%. That’s weak, but not horrible. And, the food giant’s top and bottom lines have headed generally higher over the last ten years. Management has earned a little time to work things out.
With a long history of annual dividend increases and slow, but steady growth, conservative investors would do well to consider PepsiCo shares as the company stands today.
It May Not Be Easy
Breaking Sony up may be an easy way to create value for a short-term trade, but it isn’t likely to help the company over the long term. Sony’s seemingly divergent businesses complement each other in important ways. That’s particularly true as devices and content become more entwined. The end-of-year release of PlayStation 4 will be important to watch in this regard.
Sony shares have jumped on Loeb’s involvement. Expect news to drive the stock in the near term. Loeb shifting gears in an attempt to push his “suggestion” shouldn’t inspire confidence in his side of this discussion. That said, there’s still notable turnaround potential at this struggling giant as it begins to right its electronics group. If there’s a split, however, investors should totally reevaluate their involvement here.
The article Loeb Bumps It Up A Notch originally appeared on Fool.com and is written by Reuben Brewer.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends PepsiCo and Walt Disney (NYSE:DIS). The Motley Fool owns shares of PepsiCo and Walt Disney. Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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