The Battle for Sony Financial Holdings
Shareholder activism is on the rise in Japan, despite some criticism of the Ministry of Finance's classification of listed companies by national security concerns. It is only that the impact of said activism is not always quite what was intended.
After having a first go at Sony in 2013, Third Point's Dan Loeb came back in June 2019 with a 100+ page proposal for "A Stronger Sony", backed up by a 2% (USD 1.5bn) stake in the group. In his presentation, Loeb stated that while in 2013, Sony's profitability was so depressed that Sony Financial Holdings (SFH) accounted for 61% of the group's profits, by 2019 the cash flow from SFH was no longer critical to Sony's financial stability. Given that Sony traded at a meaningful discount to major peers in all of its core businesses, the core Third Point thesis was that a simplification of the portfolio and focus on the entertainment segment would eliminate the conglomerate discount. In addition to SFH, this would also include the divestiture of M3, Olympus and Spotify among Sony's publicly listed equity stakes.
At that time, Sony owned a ~65% stake in SFH (up from ~60% in 2013), valued at approximately USD 6.6bn. The Life Insurance segment was the primary source of operating profits and total assets, accounting for 81% of revenues and 77% of total assets. Consistent growth of 4-5% over 20 years in term life, whole life and annuity products has seen SFH taking about 5% of Japanese policy amount in force. Insurance remains the main earnings driver - for the first quarter of fiscal year 2020, reported on August 4, 2020, financial services revenue increased 33% year-on-year, primarily due to a significant increase in net gains and losses on variable insurance investments in the separate account at Sony Life.
Long and behold, after giving Loeb's arguments serious consideration, which actually led to a divestiture of Sony's 5% stake in Olympus for nearly USD 760m in August 2019, Sony's management announced at their corporate strategy presentation on May 19, 2020 that they would make a tender offer for the remaining shares of SFH, which closed successfully on July 13. With that, SFH will be delisted on August 31, and will become a wholly-owned subsidiary of Sony on September 2. Sony states:
"The Financial Services business, managed by SFH, has a stable, high level of profit and is a core business of Sony that plays a role in our long-term growth strategy. By eliminating the listed subsidiary relationship between SFH and Sony, we intend to increase the speed of decision making, enhance management optionality and further improve the value of the business.
In addition, by capturing the minority interest and realizing tax benefits, we expect to increase Sony’s consolidated net income by approximately 40 to 50 billion yen per year going forward. And that is expected to contribute to increased earnings per share (“EPS”) and return on equity (“ROE”)."
At the very least, one of the cross-shareholdings in the Japanese public markets has been eliminated. According to John Seagrim at the recent CLSA Japan 2020 conference, there are still more than 1,200 listed companies in Japan that are 15% or more owned by another listed company in Japan. Seagrim refers to this as BIMBOS & SIMBOS opportunities - Buying in Meaningful Beneficial Owned Subsidiaries, or the Selling of Buying in Meaningful Beneficial Owned Subsidiaries. So Sony just pulled a BIMBOS on Loeb.