July 30, 2013 / 6:27 AM / in 4 years

SoftBank on course for record profit, expanding online empire

TOKYO (Reuters) - Japan’s SoftBank Corp (9984.T) is on course for a record annual profit after first-quarter earnings doubled and its billionaire founder looks to expand his Internet empire after buying a U.S. mobile carrier while his prize holding - China’s top online retailer Alibaba - prepares for an IPO.

SoftBank CEO Masayoshi Son gave no new details on his plans for No.3 U.S. mobile operator Sprint Corp (S.N) at an earnings briefing on Tuesday and declined to confirm media reports he bid unsuccessfully for Universal Music even as he was in a bidding war for Sprint.

But investors expect SoftBank’s 36.7 percent stake in China’s Alibaba, which is expected to offer shares to the public as early as this year, will give it a financial buffer to shore up Sprint’s network or to pursue other deals. Bankers estimate Alibaba could be valued at up to $100 billion in the IPO.

“There is quite a lot of value that’s held there,” said Nathan Ramler, head of research at Macquarie Securities in Tokyo. “Alibaba, as well as other sources of investment that SoftBank has, could be used as collateral if they were to get into a difficult situation.”

SoftBank issued a new forecast for consolidated operating profit of 1 trillion yen ($10.2 billion) for the full year to March 2014, in line with the average forecast of five analysts surveyed by Thomson Reuters I/B/E/S of 1.01 trillion yen.

It also logged a record quarterly operating profit of 391.03 billion yen as it consolidated online game maker Gungho Online Entertainment (3765.T).

Son acknowledged the company’s challenges with its $21.6 billion Sprint deal, the biggest overseas acquisition ever by a Japanese firm.

“The competition ahead of us in the United States, Sprint’s fight is no easy task,” he told a news conference. “We are up against major two players, Verizon and AT&T. It’s great timing that our other group companies overall are steadily growing profits so that we can focus on that (U.S.) battle.”

Investors balked when the Sprint bid was announced last October, sending SoftBank’s stock skidding 25 percent. Its interest-bearing debt now tops $60 billion and credit rating agencies Moody’s and S&P slashed its debt rating to “junk”.

    “We are concerned that Sprint may not be able to generate enough cashflow to cover its own $16 billion capital expenditures,” said Peggy Furusaka, a senior credit officer at Moody’s Japan. “In our stress case scenario, we assume SoftBank may need to debt finance $11 billion over two years to support Sprint.”

    But in a testament to Son’s ability to win investor trust in his high-stakes investment gambles, SoftBank’s shares are now more than double their value before the deal and it boasts the third-biggest market capitalization in Japan, behind only Toyota Motor Corp (7203.T) and Mitsubishi UFJ Financial Group Inc (8306.T).

    “People used to say Son was an alchemist,” said Yasuo Sakuma, portfolio manager at Bayview Asset Management in Tokyo. “He buys companies small, holds onto them through bubbles and then reaps the rewards afterwards to fund further M&A deals. That’s how SoftBank was built.”

    Alibaba has been a key part of the alchemy. Son initially invested $20 million in the Chinese company in 2000, just a year after Jack Ma started it in his apartment.

    Alibaba is now the world’s biggest online retailer, outstripping Amazon.com Inc (AMZN.O) and eBay Inc (EBAY.O), and SoftBank is its biggest shareholder with a 36.7 percent stake.

    Additional reporting by Sophie Knight; Editing by Edmund Klamann and Matt Driskill

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