Back in April, in a letter to its investors, Third Point remarked that it had begun building stakes in Japanese companies. At the time, I speculated that Sony Corporation (ADR) (NYSE:SNE) could be a stock Third Point was buying.
That proved to be a prescient call. On Tuesday, Third Point revealed that it holds more shares of Sony than any other investor. And Third Point isn’t satisfied sitting by idly.
Rather, Third Point is pushing for a partial breakup. But what’s Third Point’s angle, and how should other investors position themselves?
The plunging yen
Reading Third Point’s letter to investors in April, it seemed as though the fund was primarily interested in Japanese equities because of the plunging yen:
“[The Bank of Japan] managed to exceed even the highest of expectations with their initial actions…the steps amounted to a complete reboot of the Japanese monetary experiment…The impact of this bold plan should be far-reaching…[we] have taken selected positions in single name stocks that we believe will benefit from this policy shift.”
No doubt, the yen has cratered since December, when current Prime Minister Shinzo Abe won Japan’s highest office. As prime minister, Abe has pushed for what has come to be known as “Abenomics” — an explicit inflation target accomplished through an aggressive monetary policy.
In the last six months, the yen has dropped by over 25% against the U.S. dollar, while Japanese equities have soared. Japan’s Nikkei 225 stock index is up roughly 70% since November.
The Proshares UltraShort Yen ETF is a fund that attempts to replicate the performance of the U.S. dollar/Japanese yen currency pair, with leverage. While the yen has dropped 25% against the dollar in the last six months, YCS has soared — up nearly 60%.
There are dangers to holding leveraged ETFs, but if the yen continues to move lower, YCS should continue to power higher.
Sony is a major exporter
When I speculated that Loeb could be buying Sony in April, it made obvious sense from a monetary policy standpoint. Sony, as a maker of electronics, is a major exporter; thus, a weaker yen directly helps the firm.
Sony’s upcoming PlayStation 4, if priced at 40,000 yen as rumored, would’ve cost an American buyer $500 if it had been released last holiday season. But now, if Sony were to release it tomorrow, it would cost less than $400.
If the yen continues to weaken, Sony could price the PlayStation 4 at $350 or less when it comes out this fall — a big competitive advantage in the company’s continued battle with Microsoft for video game console dominance.
And that’s just one example. The same phenomenon would largely apply to all of Sony’s other electronic products — TVs, stereos, smart phones, etc.
Third Point wants Sony Entertainment
But based on Third Point’s letter to Sony’s management, the fund appears to be more interested in Sony’s entertainment business than in its electronics division.
Specifically, Third Point refers to Sony Entertainment as a “hidden gem,” and a division that most casual observers would be “surprised” to learn composes most of Sony’s enterprise value.
Third Point calls on Sony to take 15%-20% of Sony Entertainment public. But not just a standard offering or spin off — Third Point wants a subscription-based rights offering.
This is notable, because it means that many of Sony’s investors would likely not participate. If these investors, as Third Point suggests, believe they own an electronics giant, what would incline them to buy shares of its entertainment division?
Further, Third Point’s proposal calls for Sony to load the entertainment division with the firm’s debt — in the process, making it even less attractive to existing shareholders.
The success of Sears’ spinoff
In the fall of 2012, Sears Holdings undertook a spinoff using the subscription-rights model. The firm packaged together some of its fringe assets — its outlet and appliance stores — and offered them to shareholders.
The resulting spin-off company, Sears Hometown and Outlet Stores (NASDAQ:SHOS), has performed amazingly well. Since being spun off from the parent company, SHOS is up more than 40% — way outperforming Sears Holdings, which has rallied only about 5% in the same period of time.
This isn’t particularly surprising given the rebound in housing. SHOS is more appliance- and tool-focused than its parent company. As the demand for homes increases, there is a similar increase in the demand for appliances and hardware.
Can Third Point steal Sony Entertainment?
Third Point clearly sees tremendous value in Sony’s Entertainment division, and if the fund wants a rights offering, it probably hopes to sneak its purchase by the market.
If (and that’s admittedly a big if) Third Point can convince Sony to undertake the offering, investors would be smart to follow Third Point into Sony Entertainment. Like SHOS, they could wind up purchasing an underappreciated division poised for big gains.
The article Can Third Point Steal Sony Entertainment? originally appeared on Fool.com.
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