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Just six weeks ago, Chairman Masayoshi Son was crowing about the value of SoftBank Group Corp and brushing off the notion that he should sell his prized stake in Alibaba Group Holding Ltd after a terrible quarter and massive asset writedowns.
Things change. In a surprise announcement on March 23, the Japanese conglomerate said it plans to peddle or monetise up to 4.5 trillion yen ($41 billion) of assets over the next year. It plans to use that cash to execute 2 trillion yen of buybacks as well as redeem debt and repurchase bonds.
Make no mistake, this is a fire sale. Son’s most likely source of cash over the next few years was supposed to be his $100 billion Vision Fund, but with the Covid-19-spurred global stock meltdown adding to his ill-advised investment in The We Co (better known as WeWork), that spigot won’t be flowing any time soon.
Meanwhile, activist shareholder Elliott Management Co is pushing the SoftBank boss to buy back shares, and there are at least 1 trillion yen in bond redemptions between now and the end of next year.
So instead of just one challenge or two, SoftBank is facing a barrage and equity investors know it. That’s sent the company’s shares down 45% from a
recent peak.
Making that trauma worse: Shares of Alibaba are off 21%. SoftBank’s 25.2% stake in the Chinese e-commerce giant is now worth at least $33 billion less than
in mid-January, highlighting the cold reality that an
upward trajectory for Son’s most beloved investment isn’t assured.
Not only is
Alibaba SoftBank’s largest asset — 54% of holdings at the end of December — it’s a chief source of both net income and cash flow.
The stake in Alibaba has to be at the top SoftBank’s “for sale†list. Son has had trouble making successful deals lately, so it undermines his reputation to see the crown jewel also lose its shine. Yet it’s partly because of the details of Alibaba’s contributions that SoftBank is vulnerable and those shares need to be sold.
Almost half of SoftBank’s pre-tax net income for the nine months to December 31 were pure paper profits tied to Alibaba. A quarter came from a revaluation of its stake when Alibaba listed in Hong Kong last November. Another portion came when Alibaba took equity in its fintech unit, Ant Small and Micro Financial Services Group Co. If not for these one-time gains, SoftBank’s pre-tax profit would have dropped 34%.
While Son proudly notes that Alibaba enjoys an A+ credit rating and churned out 900 billion yen ($8.2 billion) in free cash flow in the second half of last year,
none of that money went to SoftBank, the single-biggest shareholder. Alibaba doesn’t pay dividends.
To monetise its stake in China’s most valuable company, SoftBank has been forced to take out margin loans with Alibaba shares as collateral. In the last three quarters of 2019, it boosted borrowing against Alibaba shares by $4.4 billion, or an additional 83%.
—Bloomberg
Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News