Tokyo: Masayoshi Son’s pitch to US hedge funds and financial institutions on the merits of SoftBank Group Corp just got harder, with a record market plunge that has made investors skittish and raised risks for its portfolio companies.
The Japanese billionaire will be in New York for the first such meeting since the implosion of WeWork. In the months since, Paul Singer’s Elliott Management Corp took a stake in SoftBank, arguing the Japanese company’s shares are undervalued compared with its assets.
At the event, organised by Goldman Sachs Group Inc, Son will have to make his case after the fastest market correction on record over concerns of the coronavirus. That may make it more difficult for the money-losing startups he has backed – like Didi Chuxing, Grab and Oyo – to go public. It may also heighten concerns about SoftBank’s massive debt load.
Son, 62, is likely to point to the approved sale of Sprint Corp, a rally in Uber Technologies Inc shares and Elliott’s purchase of SoftBank stock as signs of improving fortunes. Convincing investors the tide has turned will hinge on a handful of key questions.
How will he respond to Elliott?
Speaking at an earnings briefing on Feb 13, Son called the New York-based activist investor an “important partner” and said he’s in broad agreement with Elliott’s arguments for buybacks and increasing the stock price. Son has signalled less receptiveness to Elliott’s other suggestions: selling more of the stake in Alibaba Group Holding Ltd and reining in the Vision Fund, a US$100bil investment vehicle that accounted for more than US$10bil of losses in the past two quarters.
Son is personally handling interactions with Elliott, according to a source. Chief financial officer Yoshimitsu Goto, chief operating officer Marcelo Claure, head of the Vision Fund Rajeev Misra, and SoftBank Group’s Robert Townsend are also closely involved, the source said.
The news of Elliott’s stake, which people familiar with the matter have said is a nearly US$3bil, sent SoftBank’s shares up the most in a year, but they have since retreated over 10%. It’s not clear whether representatives from Elliott will be at the event, which was scheduled before the activist investor disclosed its stake and is not designed to specifically address its involvement.
Will he fund a big buyback?
Elliott has called for a buyback of as much as US$20bil, which would be several times SoftBank’s biggest repurchase to date. The company’s last buyback was its biggest at 600 billion yen (US$5.5bil). Announced in February 2019, it sparked a rally that pushed the stock to its highest price in about two decades.
Selling Alibaba shares to pay for a buyback, as Elliott has proposed, could be a point of contention with Son. In the past, Son has used its stake as collateral to borrow money for big acquisitions, including the US$32bil purchase of chip designer ARM Holdings. Son said during SoftBank’s latest quarterly financial briefing that he’d prefer to sell as little as possible and that there’s “no rush” to do so.
While Elliott and SoftBank have yet to discuss specific amounts, a buyback is an easy sell for Son, since one was already in the works before the activist’s involvement, the person familiar said. SoftBank has also stoked expectations when it announced on Feb 19 plans to borrow as much as 500 billion yen by putting up shares of its Japanese telecom unit as collateral.
How risky is SoftBank’s debt load?
The loan has raised questions about SoftBank’s massive debt pile. SoftBank said the money will come from 16 financial institutions and pledged as much as 953 million shares of SoftBank Corp as collateral. Overseas banks will provide the bulk of the margin loan, with JPMorgan Chase & Co and Credit Suisse Group AG contributing 68 billion yen each, the Nikkei reported.
“It’s very worrisome that to raise just a few billion dollars of debt, Son had to go to a dozen banks. On top of that they had to put up collateral worth US$15bil, ” said Atul Goyal, senior analyst at Jefferies Group. “It looks like Japanese banks are worried about concentration risks.”
SoftBank had 19.25 trillion yen of interest-bearing debt as of Dec 31, a 23% increase since the start of the fiscal year in April. Sprint’s imminent merger with T-Mobile will lighten the load by about 4.9 trillion yen. Still, SoftBank may find it a challenge to balance shareholder returns with big-ticket investments in technology companies. The company had 3.8 trillion yen of cash and equivalents, while more than 2.6 trillion yen of bonds are coming due in the next three years.
What is the Vision Fund’s future?
The Vision Fund is recovering from a series of stumbles. WeWork’s plan to go public last year imploded, forcing SoftBank to arrange a rescue financing of US$9.5bil in October. Uber, despite a recent surge, is trading about 24% below last year’s offering price.
The fund has suffered other high-profile setbacks, including investments in failed online retailer Brandless Inc, dog-walking app Wag Labs Inc and pizza robot company Zume Pizza Inc.
Elliott wants SoftBank to set up a special committee to review investment processes at the Vision Fund. It also argues the fund has dragged down the share price despite making up a small portion of assets under management, said people familiar with the discussions.
Son himself has conceded that missteps with the original fund are making it difficult to raise money for a successor. He said in February that SoftBank may need to invest in startups using solely its own capital for a year or two.
“Vision Fund 1 companies will need more cash and many of them will not be able to get it at the same valuation, which means more losses for SoftBank, ” Jefferies’ Goyal said. “Without a second Vision Fund, how will these companies get funding?”
Will he improve governance?
Some at SoftBank are resistant to the idea of an oversight committee. Instead, SoftBank is seeking to resolve issues at the Vision Fund with new governance standards for the companies it invests in. The new rules will encompass how the fund approaches the composition of the board of directors, founder and management rights, rights of shareholders, and mitigation of potential conflicts of interest.SoftBank recognised the need for more oversight as early as 2018, when it charged Claure with a broad review of operations across SoftBank companies. The COO, formerly the head of Sprint, spent months assembling a team of about 40 executives. In the end, he was forced to cede control of the so-called SoftBank Operating Group to Misra, the head of the fund it was supposed to be overseeing.
Will he support Rajeev Misra?
The spat was only the latest in a string of internal conflicts centred on Misra, the veteran Wall Street trader who once ran the Deutsche Bank subprime team immortalised in “The Big Short.”
News reports alleged that Misra masterminded attacks that led to the departures of SoftBank President Nikesh Arora and Alok Sama, a contender for Misra’s position at the Vision Fund. The latest revelations in a Wall Street Journal story last week detailed an alleged smear campaign that included a US$500,000 payment to a shadowy Italian businessman who had worked with private intelligence operatives and computer hackers, and attempts at sexual blackmail.
“If these allegations are true, Misra has damaged not only his own reputation, but that of SoftBank as a whole, ” Goyal said. “Son will do well to address this.”
SoftBank’s board of directors had previously completed a review of allegations about Arora and concluded the claims are without merit. The company also said that it is looking into latest details.
“Misra could be the sacrificial lamb, ” said Justin Tang, head of Asian research at United First Partners in Singapore.
“Throwing him under the bus would certainly send a signal that things are changing.” — Bloomberg
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