• Friday, March 29, 2024
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SoftBank’s cash has poured out — it’s starting to come back

SoftBank’s cash has poured out — it’s starting to come back

Since SoftBank founder Masayoshi Son launched his $100bn Vision Fund in 2017, the business world has been fixated on the outflows: billions have gone to companies that range from Grab, the Singaporean car-hailing service, to WeWork, the US shared office provider.

The critical view of Mr Son as an opportunistic and even whimsical investor was given fresh ammunition last week with the revelations that he had lost $130m of his personal fortune on a bitcoin investment and poured €900m of SoftBank funds into Wirecard, the German payments group fighting an accounting scandal.

But the money is now also starting to flow the other way. Armed with cash from the $23.5bn listing of SoftBank’s mobile unit and Japan’s largest-ever corporate bond sale to retail investors, and with Uber’s blockbuster IPO around the corner, Mr Son is finally starting to dispel the notion that his Japanese technology conglomerate is risk-addicted and debt-laden. So flush is Mr Son feeling that he launched a $5.5bn share buyback in February.

“Until now, SoftBank was viewed as a group loaded with debt and doing dangerous things,” Mr Son said in February. “In time, all that noise will go away.”

Mr Son has consistently complained that investors do not appreciate the group’s true worth. In February, when its market capitalisation was ¥9tn ($80bn), he argued that SoftBank shares were undervalued by nearly 60 per cent. His calculations put the company’s net debt at ¥3.6tn and its trove of equity holdings including Alibaba, WeWork and Uber at ¥25tn, implying ¥21tn of value for shareholders.

Now, more investors are beginning to buy into his view.

Since the public offering on December 19 of stock in its mobile subsidiary, SoftBank Group shares have risen 41 per cent to a 19-year high.

The cost of five-year credit-default swaps to insure against non-payment of debt by SoftBank has dropped by nearly 100 basis points since the start of the year to 170 bps, according to data from Bloomberg, having risen sharply after the murder of journalist Jamal Khashoggi prompted concern about the group’s ties to Saudi Arabia.

Richard Kaye, a portfolio manager at French asset manager Comgest, a SoftBank shareholder with a $50m stake, said that events, including the flotation of SoftBank’s mobile unit and the filing for an IPO by Uber, where SoftBank is the largest shareholder, have given investors confidence in the Japanese group’s ability to monetise its assets.

“This could be the beginning of a rather long reassessment by investors of SoftBank’s potential,” Mr Kaye said.

The company’s $4.5bn bond issuance to Japanese retail investors this month was fully subscribed on the first day, even though SoftBank is still rated below investment grade by Moody’s and S&P.

Given the coupon of 1.64 per cent, well above the country’s near-zero interest rates, analysts said the scale of retail demand was not unexpected but was still impressive considering that SoftBank has already sold more than $40bn in bonds to individual investors.

In a sign of some lingering investor concern, however, SoftBank shares fell 3.6 per cent late last week after reports of opposition from the US Department of Justice’s antitrust staff to a merger between T-Mobile and SoftBank’s US mobile carrier Sprint.

Despite the recent rally, shares in SoftBank remain undervalued by 40 per cent, applying Mr Son’s metrics. For that remaining “conglomerate discount” to narrow, Uber’s planned IPO in early May, in which the US car-hailing group is aiming to raise as much as $9bn, could be crucial, according to investors and analysts.

SoftBank, which invested $7.7bn for a 16.3 per cent stake in Uber via the Vision Fund, could end up with a stake worth nearly $11bn if the US group achieves its planned IPO valuation of $91.5bn. Filings show it may also sell about $272m of shares at the IPO if there is sufficient demand.

But if SoftBank decides to sell a larger part of its Uber stake following the 180-day lock-up period, it is unclear whether those gains would be used to make big new bets in technology, pay down debt or return money to shareholders.

“Since SoftBank is the kind of company that could aggressively make new investments, possibly through a Vision Fund II, we’d like to see how it will use the cash,” said Motoki Yanase, Moody’s vice-president and senior credit officer.

“The Vision Fund investments have gone well so far but there is no guarantee that will continue with these investments in volatile internet companies,” Mr Yanase added.

The Vision Fund contributed 40 per cent to SoftBank’s operating profit last quarter, but most of that is unrealised gains that do not pass through the group’s books as cash. If Uber’s IPO is followed by others such as Chinese rival Didi Chuxing and Slack, the workplace messaging app, SoftBank will be armed with more actual cash.

“The biggest issue SoftBank faces is how they can ensure steady cash flow since its investments are just going to keep on increasing,” said Satoru Kikuchi, analyst at SMBC Nikko Securities. Alibaba and Sprint do not generate dividends, and its cash-cow mobile unit is now likely to generate only about half the cash it used to following its listing.

SoftBank’s Vision Fund is also heavily leveraged, relying on an unconventional structure where 40 per cent of its capital is preferred securities that pay an annual coupon of 7 per cent. Analysts warn that that set-up exacerbates SoftBank’s need to fund debt repayments and the risk that the company would have to deploy its own capital if the fund ran low on liquidity.

Yoshimitsu Goto, SoftBank’s chief financial officer, said concern about the company’s ¥17tn in interest-bearing group debt was overblown, noting that the company always kept enough cash to cover two years’ worth of its debt maturities.

He said its net debt figure falls to ¥3.6tn, adding in such cash holdings and stripping out the debt held by its subsidiaries such as Sprint and its mobile unit, for which SoftBank is not liable if they default.
While that may be technically true, any sign that its subsidiaries are struggling to make debt payments would have a knock-on effect on SoftBank’s own creditworthiness and borrowing costs.

Atul Goyal, analyst at Jefferies, warned: “When recession hits, SoftBank stock will suffer as investors will short heavily levered balance sheets and the value of its investee companies will drop sharply.”