In a letter to investors Monday, Third Point says that that they find it "perplexing" that Sony CEO Kazuo Hirai "does not worry about a division that has just released 2013"s versions of 'Waterworld' and 'Ishtar' back-to-back, instead giving free passes" to Lynton and Pascal, the "executives responsible for these debacles."
"To us, the latest blunders are prima facie evidence of our thesis that Entertainment's U.S.-based business is being ineffectively overseen and needs its own governance structure led by a board whose job it will be to worry about such troubling results," Third Point said.
In May, Third Point's Daniel Loeb delivered a letter to Hirai, calling for a spinoff of as much as 20% of the entertainment division. Although the letter was critical of studio management, it did not refer to them by name. Third Point increased its stake in Sony, and last month had about 70 million shares, or about 6.9%.
A spokesman for Sony said they had no immediate comment. But the studio has reported cost cuts in the past year and has, compared to the TV and electronics divisions, been a bright spot in the Sony empire. Some analysts, accepting the wisdom of spinning off the division, nevertheless express regard for the studio management.
Nevertheless, Third Point said that the entertainment division has a culture that "is characterized by a complete lack of accountability and poor financial controls." It said that the division "remains poorly managed, with a famously boated 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."
Third Point argues that if the entertainment division -- which includes music, movies, TV production and cable -- "achieved peer margins," its earnings before the deduction of interest, tax and amortization expenses, or EBITDA, would increase nearly $800 million to just over $2 billion.
While Hirai expressed confidence in the entertainment business at a recent conference in Sun Valley, he also said Sony Corp. would give serious consideration to Loeb's proposal. The board is expected to meet Wednesday in advance of the company's earnings call, although insiders don't anticipate a decision any time soon. Sony Corp. is expected to hold a major strategy meeting in September, according to one individual with knowledge of plans, and an answer on a Sony spinoff could come after that.
Third Point also said it was "concerned" about the 2014 and 2015 film slate, saying that it lacks "lucrative 'tent pole' franchises" and that its "pipeline is bleak, despite overspending on numerous projects."
Third Point did offer praise to Hirai for changes made in the electronics business, by cutting overhead an the number of products offered, They also praised the "perfectly executed introduction" of Playstation 4, and said that the "visible improvement in Sony's new products has caused us to rethink our approach to valuing Electronics."
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