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Masa Son unveils a $41 billion asset sale to silence his critics

Son is trying to salvage his reputation as one of the world’s foremost tech investors, a name based largely on a prescient early bet on Alibaba, which grew to dominate e-commerce in the world’s No. 2 economy. But he’s struggled since to match that success, after sinking money into a string of struggling startups from Uber Technologies Inc. to WeWork and Oyo Hotels.

Bloomberg|
Last Updated: Mar 24, 2020, 09.05 AM IST
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AFP
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SoftBank has said its financial policy is to have enough liquidity on hand to cover two years of bond repayments and focus on its loan-to-value ratio, a metric for balancing net interest-bearing debt against the value of investments.
By Pavel Alpeyev and Takahiko Hyuga

Masayoshi Son is making his biggest play yet to silence doubters. On Monday, the Japanese billionaire unveiled an unprecedented $41 billion plan to sell off assets and shore up SoftBank Group Corp.’s crumbling market value in the face of the coronavirus pandemic.

SoftBank aims to sell assets to raise as much as 4.5 trillion yen ($41 billion) over the coming year to buy back stock and slash debt -- an amount equivalent to almost its entire market value last week. The scale of the endeavor surprised investors, sending the Japanese firm’s stock up 19%. Yet that’s a fraction of the capitalization the investment house has lost since its 2020 peak, underscoring persistent concerns that tumbling technology sector valuations will damage Son’s debt-laden company.

The Japanese conglomerate, which also operates the $100 billion Vision Fund, is considered especially vulnerable to economic shocks given its enormous debt load and ties to unprofitable startups across the world. After Monday’s rally, it’s still down more than 40% from this year’s peak in February.

The coronavirus-triggered rout has also spread to credit markets and sparked a surge in the cost of insuring debt against default -- including that of SoftBank, whose credit-default swaps touched their highest level in about a decade.

Monday’s announcement appeared intended to underscore a point Son himself has made repeatedly: that SoftBank is worth far more than its current stock price thanks to holdings in industry leaders from e-commerce giant Alibaba Group Holding Ltd. to British chip designer Arm Holdings Plc and Japanese carrier arm SoftBank Corp. Its slice of Alibaba alone is worth more than $120 billion.

“Son is finally doing what his investors have been asking for years and unfortunately it took an unprecedented sequence of events for him to do so,” said Justin Tang, head of Asian research at United First Partners in Singapore. “His Vision Fund ambition will have to take a backseat for now, but he will be back.”

It’s unclear what SoftBank intends to sell, however. Alibaba represents its single biggest chunk of unrealized value, but Arm -- which SoftBank bought for $32 billion in 2016 -- is a worldwide leader in the chip architecture that underpins modern smartphones. SoftBank Corp., on the other hand, is a steady if unspectacular leader that generates cash to help fund Son’s global ambitions, and the group likes to use its stock as collateral for loans.

“Arm is a golden egg for SoftBank, and the business will attract U.S. firms like Intel once it starts a bidding process,” said Koji Hirai, the head of M&A at advisory firm Kachitas Corp. in Tokyo.

Part of the sale proceeds would go toward a new share buyback program of as much as 2 trillion yen that comes on top of previously announced repurchases. Alibaba’s stock was down more than 5% in the afternoon in Hong Kong. The Japanese firm’s domestic telecom arm, ended 3.4% lower. SoftBank spokeswoman Hiroe Kotera declined to comment on whether it would sell shares in the Chinese e-commerce giant.

“There is institutional memory at SoftBank of these kinds of shocks, first dating back to the dot-com bubble,” said Kirk Boodry, an analyst at Redex Holdings who writes for Smartkarma. “There is no doubt that there will be much more bad news coming from the Vision Fund, bankruptcies and falling valuations. This is one way SoftBank can get ahead of that.”

What Bloomberg Intelligence Says
SoftBank may sell some of its 26% Alibaba stake, which we believe accounts for about half its net asset value, to fulfill a $41 billion divestment pledge. The pending deconsolidation of its U.S. telecom subsidiary Sprint won’t generate any cash proceeds for SoftBank, as the transaction is an all-stock merger with T-Mobile. - Anthea Lai, analyst

Son is trying to salvage his reputation as one of the world’s foremost tech investors, a name based largely on a prescient early bet on Alibaba, which grew to dominate e-commerce in the world’s No. 2 economy. But he’s struggled since to match that success, after sinking money into a string of struggling startups from Uber Technologies Inc. to WeWork and Oyo Hotels.

Even before the global outbreak, WeWork’s spectacular implosion served as a catalyst for Son to temper SoftBank’s and the Vision Fund’s aggressive global bets. He urged founders to rein in excesses and focus on the bottom line, wary of a repeat of WeWork’s uninhibited expansion.

Son has reason to worry. SoftBank’s exposure to cash-burning startups partly prompted S&P Global Ratings to cut its outlook on SoftBank to negative, citing also the broader market declines and the conglomerate’s initial plans for a buyback. The stock repurchase program announced Monday comes on top of a 500 billion yen plan announced just over a week ago, after activist shareholder Elliott Management Corp. called on the Japanese investment firm to boost returns.

Some of SoftBank’s Highest-Profile Bets
  • WeWork
  • Uber
  • Slack
  • Oyo Hotel
  • Arm
  • Alibaba
  • SoftBank Corp.
SoftBank has said its financial policy is to have enough liquidity on hand to cover two years of bond repayments and focus on its loan-to-value ratio, a metric for balancing net interest-bearing debt against the value of investments. SoftBank has also said it’s curbing new investments to match the current environment and acknowledged that fundraising costs are likely to rise.

It keeps a running tally of what it calculates is the value of its shares, excluding its debt. Despite Monday’s rally, that figure remains more than three times its closing price of 3,187 yen.

While SoftBank’s newly unveiled asset sale and buyback plan would go some way toward assuaging concerns about its situation, the big question remains the spread of Covid-19 and its ultimate impact on both investment activity and the broader economy.

“SoftBank is now trying to sell its assets as the values for those are cheap,” said Mitsushige Akino, an executive officer at Ichiyoshi Asset Management Co. in Japan. “Investment companies are supposed to purchase assets when they are cheap and sell them when they are expensive. It looks like SoftBank is doing the opposite, when they have to invest more money.”
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