SoftBank’s Son is running out of ammunition

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3 minute read

A journalist raises her hand to ask a question to Japan's SoftBank Group Corp Chief Executive Masayoshi Son during a news conference in Tokyo, Japan, November 5, 2018. REUTERS/Kim Kyung-Hoon

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LONDON, May 12 (Reuters Breakingviews) - Masayoshi Son’s medicine is losing its potency. His technology holding company, SoftBank Group (9984.T), is worth less than half the paper value of its net assets. In the past the Japanese billionaire has used massive buybacks to prop up a sagging share price, but high leverage makes that tricky now. Unless he considers more radical measures like a breakup, the discount valuation will persist.

A broader market rout has left Son’s company nursing heavy losses on the portfolio of startups held through its two Vision Fund vehicles, which account for about 40% of its overall asset value. The relevant division of SoftBank recorded a 3.5 trillion yen ($28 billion) loss on its investments for the financial year that ended in March, according to results released on Thursday.

Meanwhile Son’s fellow shareholders refuse to give the 64-year-old credit for the paper value of his technology conglomerate. By SoftBank’s reckoning, it had about 23.1 trillion yen ($180 billion) of assets on March 31 – comprised of the Vision Funds, an eponymous telecom operator, chip designer Arm and a large stake in Chinese e-commerce group Alibaba (9988.HK). Deduct net debt, and the theoretical equity value is 18.5 trillion yen ($144 billion). SoftBank’s market capitalisation of 7.4 trillion yen ($57 billion) is significantly less than half that level.

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Son typically initiates share buybacks to put a floor under the price. In November he launched a 1 trillion yen ($7.8 billion) repurchase programme, of which he’d completed 43% by April. That hasn’t stopped the shares from falling by one-third over the past six months. One problem is that buying back shares increases leverage. Son likes to keep net debt below 25% of the company’s gross asset value. On March 31 the ratio was 20%, and it’s probably higher now given the continued slump in technology stocks. That means SoftBank has limited buyback firepower.

Son has other options. Spinning off the listed stakes - including Alibaba, the Japanese telecom operator and Vision Fund’s public holdings - would make the group a more focused bet on private technology stocks, eroding the conglomerate discount. But that would be no fun for Son, who would lose the assets that he uses as a kind of piggy bank for his investments in younger startups. The upshot is that SoftBank’s discount may be here to stay.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are their own.)

CONTEXT NEWS

- SoftBank Group on May 12 recorded a roughly $28 billion investment loss on the holdings in its two Vision Fund technology investment vehicles. Chief executive and founder Masayoshi Son attributed the biggest portion of the writedown to two companies: Korean e-commerce group Coupang and Chinese ride-hailing service Didi Global.

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Editing by George Hay, Streisand Neto and Oliver Taslic

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