Third Point Management Activist Presentation Deck | Slidebook.io

Third Point Management Activist Presentation Deck

June 2019, 102 slides

a june third point | Third Point Management

| Third Point Management

agenda executive summary a high quality company at a significant discount the way forward closing the gap to intrinsic value and positioning for long term success technologies a technology champion abundant long term growth drivers new a creative entertainment leader strong cash flow and secular growth publicly listed stakes and capital structure discussion appendix high quality long term long term | Third Point Management

executive summary is a one of a kind collection of market leading assets benefitting from year gaming of profits world video game platform benefitting from an industry shift to recurring revenue streams such as player in game purchases and subscription programs music of profits one of the world three music labels and publishers benefitting from the rapid rise in paid subscription streaming services and the of industry revenues pictures of profits fifth film studio benefitting from deep library of iconic and accelerating demand for video content from streaming distribution platforms semiconductors of profits world image sensor manufacturer benefitting from growing importance of picture and video quality in social media and cars autonomous driving current corporate structure obscures the company underlying asset value giving investors the opportunity to buy at a discount to our estimate of intrinsic value at trades at a deep discount to publicly traded peers exposed to identical trends with valuations ranging from in addition has an enormous capital deployment opportunity with a net cash balance sheet strong free cash flow from after growth and of market cap of listed stakes that could be monetized and in the core business third point proposes a strategic plan for to close this gap and unlock its full value while creating a company better positioned to capture future growth opportunities one of a kind market leading year | Third Point Management

perception reality | Third Point Management

strong track record with further value to be created is a well managed company with high quality assets but is misunderstood by the market under san leadership first as now as has significantly grown profits and capitalized on a number of favorable business trends despite this success does not get the credit it deserves it trades at an enormous conglomerate discount third point believes in long term growth potential this presentation highlights the disconnect between valuation and business quality offers a solution that will create meaningful sustained value for management employees customers and shareholders with a thoughtful review of the portfolio and measured capital allocation can position itself for further value creation and tremendous long term growth management has turned around as they shift their focus to portfolio we think is on the cusp of massive value creation well managed high quality san long term long term | Third Point Management

management has delivered exceptional recent operating performance over the past years the operational improvement at has been dramatic in profitability was so depressed that partially owned insurance subsidiary financial holdings accounted for of the company profits under the thoughtful leadership of san and team has grown at a even more impressive is that profitability in gaming music pictures and semiconductors segments which we refer to as the crown jewel businesses have grown profits over the same period and now represent the majority of earnings and value san | Third Point Management

benefits from strong conversion | Third Point Management

investors may not appreciate the transformation that has taken place at the of revenue and profit base has shifted significantly over the past years entertainment and semiconductors together have increased from to of sales and from to of operating profit as a result the quality of earnings has improved significantly higher growth more recurring and better secular positioning | Third Point Management

despite strong operating performance stock trades at a depressed earnings multiple today trades at only earnings and a normalized for semiconductor growth spending yield making it one of the large cap stocks globally in our view multiple compression is perplexing particularly given the shift in profit mix towards higher multiple businesses such as gaming and music go | Third Point Management

also trades at a meaningful discount to major peers in all of its core businesses gaming music pictures semis | Third Point Management

why does trade at a discount we believe the primary cause for discounted valuation is portfolio complexity complex structure and diverse business holdings lead to a conglomerate discount investors are reluctant to own shares because of the difficulty in forecasting so many business segments in particular the semiconductor and financial segments have distinctly different business models and capital intensity relative to the entertainment assets also owns large stakes in four different publicly traded companies similarly the majority of publishing analysts are focused electronics analysts we sympathize with the challenge they face maintaining an up to date informed view on a diverse range of industries most of which are outside their core focused up to date | Third Point Management

portfolio complexity great businesses but little overlap outside of entertainment the wide range of business models within makes it difficult for investors to appreciate the quality of portfolio capital intensity low low low high high customers global global global global global japan end market entertainment entertainment entertainment electronics electronics financial services growth high high high low low industry structure consolidated consolidated consolidating oligopoly fragmented fragmented medium low high low a | Third Point Management

portfolio complexity analysts mostly focus on electronics | Third Point Management

portfolio complexity investors are reluctant to own given complexity current portfolio complexity causes analysts to discount valuation or avoid the stock altogether due to a lack of visibility on consolidated profitability given numerous unrelated business drivers the complexity of business structure which ranges from video game platforms to cutting edge semiconductors and life insurance appears to have discouraged entry by a broad range of investors if investors were to invest in in order to profit from earnings growth driven by the shift to digital distribution in the game and network services business the firm business they would also need to accept risks arising from competitive conditions in the semiconductor business and in the mobile communications business since games account for less than of total earnings reduction in portfolio complexity will improve valuation conglomerate applied price target | Third Point Management

portfolio complexity ideas on closing conglomerate discounts while several companies continue to operate as conglomerates many companies in the us and elsewhere have acknowledged the benefits of a focused portfolio third point has seen countless examples of large conglomerates that struggled until they streamlined their portfolios we observed that the best way to achieve long term success and full value for a company is to fully separate businesses with dissimilar capital intensity and customer bases properly leadership at each business based on the performance of their business articulate clear capital allocation priorities for each business in our experience full spin offs to existing shareholders are the best way to close conglomerate discounts while selling minority stakes to spotlight value has poor results while the of a subsidiary can achieve some of the stated goals of a spin off increases accountability improves performance and aligns incentives the parent company may continue to trade at a substantial discount may actually increase analytical complexity selling a minority stake to a party achieves none of the above objectives and also fails to solve the conglomerate discount problem we would strongly recommend against pursuing minority stake sales to parties finally spin offs are not just for businesses the most successful spin offs are those that are high quality businesses but are within a conglomerate structure long term spin offs shareholders spin off spin offs spin offs high quality | Third Point Management

recommendations to accelerate transformation to a creative entertainment company | Third Point Management

a strong focused shareholders creative entertainment leader spin to shareholders new semiconductors gaming music pictures electronics consider monetizing for cash financial | Third Point Management

significant upside if value is unlocked we see significant upside over the medium term if value is unlocked share price upside is even higher if continues to buy its own shares at a discount to intrinsic value importantly under this plan would be well positioned to continue to grow over the long term medium term well positioned long term | Third Point Management

conclusion unique opportunity to create value is a collection of high quality businesses trading at a massive discount to intrinsic value exposure to favorable secular trends will allow the company to increase intrinsic value for years to come at the same time has a number of attractive options close this discount while also growing value simplifying the corporate structure will highlight the quality of portfolio and attract new investors third point believes a spin off of semiconductors and sales of listed stakes is the best way to close the conglomerate discount increasing balance sheet efficiency will lead to dramatic earnings per share growth and higher roe strong cash flow proceeds from listed stakes and a net cash balance sheet provide an opportunity to repurchase shares an investment in existing assets at a discount and invest for growth organically or through targeted a this is the right time and the right management team to unlock value high quality spin off | Third Point Management

technologies creation of a tech champion third point | Third Point Management

japan was a pioneer in semiconductors during the century by japan held nearly market share of the global semiconductor market sharp | Third Point Management

but since the industry has struggled to keep up with competitors japan share of global semiconductor market fip | Third Point Management

nevertheless semiconductors has grown and flourished despite the challenges faced by the semiconductor industry in recent years semiconductors has shown robust growth semiconductors revenue revenue growth a a a a a a | Third Point Management

while maintaining a strong manufacturing base compared to the publicly traded semiconductor company has kept meaningfully more of its manufacturing and design operations onshore has also grown its employment of engineers semiconductors is a champion that continues to fuel japan innovation in the semiconductor industry location location china china chi | Third Point Management

overview of semiconductors an ree a bay | Third Point Management

image sensors has the key traits of a top tier semiconductor franchise industry best in as an | Third Point Management

image sensor market overview the image sensor market today is a market growing double digits the single end market for image sensors is the where content cameras unit is expected to drive double digit growth the next market automotive is small but growing quickly a as increases number of cameras in a car currently is largely exposed to of revenue but is gaining share in automotive | Third Point Management

current growth driver | Third Point Management

future growth driver automotive | Third Point Management

plan entering a pivotal time seems to agree with our bullish outlook on image sensors outlining ambitious targets at its day if executes on this plan technologies would be able to grow profits at a rate for the next years this growth rate would be unmatched by any other major global semiconductor company of scale today the coming years will be critical execution years to unlock value at semiconductors creating the need for oversight by a dedicated management team and board of directors market growth share gain improvement in returns and margins | Third Point Management

plan building to a billion valuation for technologies in our sum of the parts we value semiconductors at however if technologies can execute on the growth trajectory laid out at day we see the potential for the company to grow revenue by grow operating profit by compound value at annually and achieve a valuation in years sum of the parts | Third Point Management

technologies non memory memory is more semiconductor bellwethers largely trade in a range of forward year median non memory | Third Point Management

technologies spin off will create value for the long term we see value in spinning off semiconductors division into a public stock technologies to create a national champion listed in japan as a separate stock technologies would report each quarter and host separate and dedicated quarterly conference calls highlighting the strengths and accomplishments of semiconductor business create one of japan and only semiconductor businesses owned by shareholders as well as attract a new semiconductor dedicated shareholder group elevate top tier semiconductor managers to the spotlight highlighting japan management talent allow management and employees to receive incentives to drive growth innovation and financial performance technologies will shed light on the past accomplishments and future successes for semiconductors to the benefit of all stakeholders | Third Point Management

several operational benefits to a technologies accelerate capital spend accelerate dedicated capital structure dedicated management team a spin off would accelerate technologies growth spin off | Third Point Management

technologies would likely accelerate capital spend electronics | Third Point Management

and broaden scope of corp top line to continue a sustainable advantage analyst day recap spending ramping as firm doubles down shares still a value into year end | Third Point Management

highlights operational benefit of semis operating as a entity originated as technologies a semiconductors division in was separated from and sold to and silver lake for under did not grow revenue in years prior to its sale and accumulated in operating losses in under the ticker at a valuation operating as a separate entity for the years post its original sale was able to grow enterprise value from to grow revenue at a from to expand operating margins from to leverage capital markets to execute transactions totaling expanding into new product lines | Third Point Management

tax considerations in the government passed tax reform that allowed companies to spin off divisions tax free a measure designed to encourage management to act boldly with shareholders in mind previously spin offs were treated as a sale in japan with corporate tax being due on the difference between fair value and book value of assets this discouraged corporations from using a method popular among their western peers our research indicates that semiconductor business can be spun off tax free under the companies act of japan accomplished via spin off scheme corporate split and a tax qualified share dividend key conditions shareholders only receive shares issued by the newly established corporation proportionate to their ratio in no party owns more than of before the corporate split and it is expected that no party would own more than of the newly established corporation after the corporate split at least one of existing directors or important employees will become a senior director of the newly established corporation the main assets liabilities of the spin off business are transferred to the newly established corporation approximately or more of directors employees engaged in the semiconductors business are expected to be engaged in businesses of the newly established corporation the newly established corporation is expected to continue to operate the semiconductors business | Third Point Management

new a leading creative entertainment company third point | Third Point Management

new will emerge as a focused growth story with double digit earnings we see new growing at or better driven primarily by secular in gaming and music of total | Third Point Management

wide array of media brands with extensive owned i a horizon music | Third Point Management

how might investors conceptualize new as a company bit | Third Point Management

new will be against global peers in the gaming music and film production sectors | Third Point Management

game network services segment overview store plus | Third Point Management

growth in the global video game tam is accelerating and is the market leader i i i | Third Point Management

has doubled its market share over the last years and now dominates the industry | Third Point Management

has successfully transitioned from a cyclical hardware business to a recurring subscription model | Third Point Management

this revenue mix shift has resulted in significant margin expansion with further upside ahead | Third Point Management

plus subscription service has scaled rapidly and become a core profit driver | Third Point Management

the ongoing shift from disc to provides a to profit growth | Third Point Management

in house game studios rival the game publishers polyphony | Third Point Management

the market is concerned about two key bear cases on gaming segment launching project | Third Point Management

historical console cycles peak in year and decline thereafter | Third Point Management

but and have mitigated by introducing backward compatible hardware and transitioning to recurring revenue are | Third Point Management

guidance indicates only modest decline in gaming profits in despite related to the console cycle transition cost improvement more than unit decrease due | Third Point Management

importantly we expect to maintain its leading position in the next console cycle | Third Point Management

cloud gaming services will need to overcome major obstacles to achieve wide adoption | Third Point Management

however the global cloud leaders are all attempting to make inroads into cloud gaming the world tech giants are sprinting at the cloud gaming opportunity making them difficult to dismiss as threats to go stadia me | Third Point Management

this the first time the media has predicted the death of the console consolation prize game is dead what will con tee | Third Point Management

what consumer problem are the cloud gaming platforms trying to solve if the answer is experience then latency needs to be lower tried stadia and | Third Point Management

what consumer problem are the cloud gaming platforms trying to solve if the answer is cost then the service needs to be priced very cheap there are currently million million console and billion mobile globally console and currently spend more on than hardware though hardware cost is the only up front barrier for a new which suggests hardware cost is not the primary hurdle to greater adoption if the new streaming platforms are trying to expand the tam by lowering total costs then the subscription services would need to be priced at a discount to the current hardware cost month for and month for console in a recent consumer survey only of non indicated that hardware cost was a primary reason they do not play console or games | Third Point Management

comparisons between game streaming and are flawed | Third Point Management

we see six primary contenders to become the next dominant gaming platform in our view the winning model will likely be a hybrid physical console streaming service is the clear leader on every competitive vector except data center footprint is also well positioned given its position in the console market and global azure data center footprint position is challenged given lack of game developer relationships lack of must have games and no existing console base | Third Point Management

the mou demonstrates a cloud streaming service can be scaled using rented owned infrastructure | Third Point Management

gaming segment could be worth on a basis by we use a conservative multiple range of for gaming segment valuation represents a modest premium to game company which all trade in a range from but a discount to us and china publishers which trade in a range of there is potential for further upside on the multiple beyond our assumed range relative to other gaming companies business is less hit driven and more predictable recurring in nature | Third Point Management

music segment overview rea arista a | Third Point Management

music will benefit from continuing acceleration in music industry growth driven by streaming acquisitions of stakes in and were well timed to take advantage of future growth in music industry revenues a well timed | Third Point Management

the streaming revolution is still in early innings music a an | Third Point Management

demographics represent an enormous for streaming | Third Point Management

streaming will drive an acceleration of revenue growth to mid teens | Third Point Management

the big labels warner all have very similar revenue mix profiles for all of the major labels today streaming revenue accounts for of total recorded music revenue by streaming will account for of recorded music revenue for all labels | Third Point Management

two market concerns in music business while we expect aggregate music industry revenues to grow rapidly the primary concern for labels is the share of that revenue they can retain concern pressure from recording artists for higher concern pressure from streaming distribution platforms for higher | Third Point Management

sale of of will shine a spotlight on the value of music | Third Point Management

music segment could be worth on a basis by for most of the past years music labels were viewed as structurally declining businesses as piracy steadily eroded industry wide revenue of value comes from the world recorded music business currently trades at forward on a however over the past years the rise of music consolidated basis streaming platforms like has returned the industry to growth the industry is likely to continue accelerating as fast growing streaming revenue becomes a bigger share of the base the market pessimistic view of music publishers and recorded music labels has started to shift as evidenced by public market valuation forward as music industry fundamentals continue to improve over the next few years we expect the market will come to view music as a scarce high quality compounder that should be valued at operating income or higher valuation reflects a conglomerate discount sell side analyst estimates for the value of range from to is the public market valuation for music given that warner music the third major music label is privately held | Third Point Management

pictures segment overview | Third Point Management

pictures deep library of film and content and licensed rights | Third Point Management

pictures has significant scale with margin upside | Third Point Management

studio entertainment industry is benefiting from demand and improving profitability | Third Point Management

among the big studios the number of films per studio has been steadily falling | Third Point Management

pictures could be worth between on a basis by with potential upside to based on transaction historical entertainment studio transaction indicate multiples for pictures ranging from and revenue time warner at mar public market warner turner acquisition of stake growth yoy low high tow high | Third Point Management

electronics san is moving in the right direction streamlining the business am | Third Point Management

mobile losses are a key concern for analysts and investors two of the major analyst downgrades to stock over the last months have cited the mobile business as a source of downside risk | Third Point Management

does not get fair value for its electronics franchise due to mobile today many analysts value as a consolidated group in their sum of the parts however this implies a negative value for mobile business and a depressed multiple for profit generating home entertainment and imaging franchises this is especially notable given most analysts have price targets well above current stock price the market value of implies an even more depressed valuation for electronics franchise will only achieve full value for its electronics franchise after bringing mobile operations to profit sum of the parts | Third Point Management

is taking steps to its mobile business | Third Point Management

greater focus will reduce mobile losses | Third Point Management

he has outperformed peers over the past years he division has outperformed peers in both sales growth and margin expansion driven by focus on high end products and superior product superior product quality is highlighted by its release of the master series model one of just two in the market today guide | Third Point Management

has outperformed peers division has kept pace with top peer growth rates by maintaining position in cameras while being the only company in japan to see margin expansion in its imaging business | Third Point Management

electronics businesses could be worth by we use a mix of and sales multiples to value business sales multiples allow us to ascribe fair value to mobile business despite the current losses we use a conservative range of for he and peers imply a valuation range of we see potential for to fully realize the value of its portfolio only if the company is able to bring its mobile business to | Third Point Management

publicly listed stakes and capital structure discussion third point | Third Point Management

listed stakes and capital structure discussion we believe listed stakes and balance sheet provide significant optionality which when combined with a compelling growth outlook could lead to a unique opportunity to create shareholder value listed stakes which total at market should be reviewed for divestiture proceeds could be used to invest in growth a or share repurchases we think shareholders would applaud further investment in entertainment assets solidifying position as a global entertainment leader given the strong cash generation of businesses we think could increase the efficiency of its balance sheet by adding a modest amount of debt would still retain strong investment grade credit metrics roe and earnings per share growth would increase dramatically | Third Point Management

listed stakes accounted for enormous value but by the market one of the key tenets of japan third arrow governance code is a review of company cross it is common in japan for corporations to hold sizeable equity stakes in other public companies these stakes often have little strategic purpose and add significant complexity while public investments have generated attractive returns we don believe the market appropriately values them within the current structure a sale would be viewed positively by investors monetizing these stakes would provide significant capital for growth investments or purchasing own undervalued stock would also meaningfully reduce complexity a major negative factor in valuation current stakes include financial holdings owns a stake in financial a market cap growth oriented life insurance business the value of this stake at current market prices is owns a stake in a market cap information supplier the value of this stake at current market prices is owns a stake in a market cap medical device company the value of this stake at current market prices is technology spot owns a stake in technology a market cap music streaming service the value of this stake at current market prices is | Third Point Management

has significant untapped balance sheet capacity today at current share price constitute an investment in existing assets at a significant discount to fair value we applaud move to initiate two separate programs thus far in together worth we estimate could repurchase in stock assuming no a over the next years while holding net leverage as of has of net cash monetization of public equity stakes and provide nearly a conservative leverage target of net debt to adds another | Third Point Management

opportunity to accelerate growth and roe through capital return | Third Point Management

apple sets strong example of share for global technology companies in after many years of maintaining a large amount of cash on its balance sheet apple announced an intention to take the company balance sheet to a cash neutral position over time by returning to investors in the following months march apple returned to shareholders of net income during the period apple actions created meaningful value for its shareholders as apple share price appreciated in the next months to an all time high and its multiple expanded to a valuation the stock had not seen in the last years though apple stock has since come down from all time highs it still trades at premium to where it traded prior to the announcement we want maintain we need fund our day to day | Third Point Management

appendix third point | Third Point Management

listed stake financial holdings financial holdings is an market cap financial services company offering life insurance non life products and banking services in the japan market is the shareholder with a stake worth the life insurance segment is the primary source of operating profits and total assets accounting for of revenues and of total assets respectively as of has approximately of policies in force primarily consisting of term life whole life and annuity products has grown policy amount in force at for the last years a flat market and now represents about of policy amount in force | Third Point Management

listed stake financial holdings general account assets of are primarily invested in bonds and and some foreign bonds with an average duration of years potential opportunity for optimization of asset portfolio to increase yield financial has consistently grown embedded value over time and market cap has generally tracked embedded value major step down in embedded value in due to steep decline in yields | Third Point Management

listed stake is an market cap information supplier that was founded in is the shareholder with a stake worth primary business is a portal where physicians can get information aiding them in diagnosis treatment get up to date medical news learn about new drugs exchange opinions with other physicians and search for career change recruitment information is also has expanded into other services such as clinical trial support and more recently outright medical device and drug development ownership which the company calls advanced medicine growth in the business has been robust with sales and growing at a and over last years ean | Third Point Management

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