Ep 37 Softbank Corp IPO
Today, we have a closer look at Softbank and its upcoming IPO for its telecom unit.
Softbank Group/Holding (9984.T) is the Japanese multinational holding conglomerate headquartered in Shiodome Tokyo, Japan. It’s holding the company that controls its famous tech investment fund – Vision Fund, telecom unit and internet business interests such as Yahoo Japan. One of these units is dressing up itself for the biggest event in its history – an Initial Public Offering (IPO). It’s the Softbank’s telecom unit, that includes Softbank Broadband and mobile phone unit.
The details of this IPO are as follows:
It’s one of Japan’s largest IPO for a long time. At an initial launch price of ¥1,500 a share, the entire unit is valued at nearly ¥7.2tn ($63bn). A bit more than a third of this company is now for sale to the public and for that local and international investment banks (Nomura, Mizuho, Deutsche Bank, Goldman Sachs, JP Morgan and SMBC Nikko are joint global coordinators for the IPO) have been engaged in an unprecedented marketing campaign, including what are believed to be “Japan’s first TV ads for a private firm’s IPO.” The final countdown and the official book building starts on Monday and a final price will be set on Dec. 10. The shares begin trading on Dec. 19.
High Valuations and Aggressive Pricing
But at 1,500 yen a share, SoftBank Corp would trade at an enterprise value of more than eight times earnings before interest, taxes, depreciation and amortization. This is much higher than the four to five times of its larger rivals NTT Docomo and KDDI according to Analyst.
It’s only natural, that some bankers and analysts getting nervous. At such aggressive pricing, they wonder whether Softbank can garner enough interest from investors. Japanese investors are not known for being risk takers when it comes to stock investments. Trading volume for Japanese stocks have been on the decline and only through the constant intervention by the Bank of Japan, has the stock market stabilized in recent years. Apparently, the BOJ is now the largest shareholder across the board of Japanese stocks.
So far these concerns have been unheard among Japanese retail investors, as brokers reported high demand from this particular group of investors attracted by the high dividend payout ratio promised (85%) and who believe in Son’s vision and investment acumen to make them rich shareholders. But are these hopes justified?
Why the Premium?
One can wonder whether telecom investments are the hot investments they used to be during the original DotCom bubble back in the late 90s. Today, the outlook for the telecom sector, especially in Japan, are bleak. A maturing market, declining population and fierce competition are just the major challenges Softbank will have to deal with in the critical eye of the open public. Only recently, it was announced that DoCoMo, the market leader, slashed subscription fees putting pressure on others to reduce prices. Furthermore, Japanese prominent e-commerce leader Rakuten announced it would enter the same market with some innovative offerings. Yet, SoftBank Corp has been pitching itself as a tech-driven growth company, saying it will launch new businesses by teaming up with startups backed by its parent’s Vision Fund. But do Softbank Corp shareholders really profit from that? Shouldn’t they invest in Softbank group instead?
Softbank’s IPO greatly reminds me of Germany’s state telecom company that went public on November 18th, 1996 at a price of EUR 28. Very similar promises were made, such as good dividends, growth through clever investments in the tech field and execution of innovative strategies. Less than six years later it traded at less of a tenth of what it traded for at its peak. Empty promises and disappointing earnings were just some of the outcomes German shareholders had to deal with for many years that followed.
But Let’s reverse the situation: How does the IPO benefit the seller rather than the buyer? What’s in it for them?
What’s in it for Softbank?
Besides brokers who would like to participate in the fee bonanza, the biggest profiteers are of course Softbank Group, the holding company and its iconic founder and CEO, Masayoshi Son. Mr. Son owns 21.21% of Softbank and he has been the driving force behind reaching higher valuations and aggressive pricing. Today, Son’s personal wealth is estimated to be north of $23 billion.
One major advantage of going public with Softbank Telecom is that Softbank Group can be easier valued by analysts and institutional investors by just referring to its independently listed parts. CEO Son has often criticized the classic holding company discount because investors wouldn’t understand the golden eggs his goose would lay within a convoluted structure of investments.
Certainly, the IPO is aimed at providing the group with funds to pay down existing debt and to fund future investments done through its various group companies – Especially the $100 billion Vision fund which made headlines in recent months – and not always for its large tech investments.
It’s reported that Softbank group would reap a windfall of about $23 billion by offering a bit more than a third of this unit for sale to the public, while still being in firm control over it’s unit without the threat of unwanted shareholder activist. The $23bn raised are close to the $25bn raised by the 2014 IPO of China’s Alibaba. The fresh funds will come in handy, which will be used to realize Son’s 300-year outlook. Yes, you heard correctly – 300 years.
Strange and Attention Grabbing Investments
So far Softbank group has invested in companies such as Uber, Nvidia or Indian fintech company PayTm among many other headline-grabbing investments. The best example is WeWork, the office sharing platform company modeled after Silicon Valley’s work environment and that encourages collaboration between its leasing tenants. Just recently Softbank Group through its Vision fund invested another 3 billion into the loss-making enterprise – which is now – you won’t believe it at a pre IPO price of 42 billion USD.
Interestingly, Fortress investment – the famous hedge fund known for distressed investments is now owned and controlled by Softbank Group. As you can imagine, to fire those investment engines, all these investments require money – lots of it, especially if Mr. Son wants to see some of his vision become reality during his lifetime (61).
The question remains, do Softbank Corp, shareholders benefit from his personal ambitions? I seriously doubt it. Again, for that, you should be buying Softbank Group or Holdings (9984) directly.
As an individual investor, I salute Softbank and Mr. Son. His biography is an undervalued/underappreciated story in the West, where people such as Bezos, Musk or Zuckerberg dominate the headlines. He single-handedly, against all odds created Softbank out of nothing to a multi-billion conglomerate that resembles more a giant Hedge Funds or Berkshire Hathaway with tech engine rather than an insurance business engine.
Nevertheless, what’s good for Softbank and its 300-year mission, that according to Son, contains golden eggs and a fat goose, does not necessarily mean it will be good for the individual investor.
Overpaying for other people’s dreams and lofty visions; for something that may or may not materialize in the far distant future has never been a winning strategy for the intelligent investor, especially at times macroeconomic shifts we seem to be experiencing over the last months.
Son is a gambler; a shrewd gambler and there is nothing wrong with that. He has been riding a wave of good fortune for a very long time. But like any gamble who overstays his/her gambling activities, he or she will eventually experience setbacks. Mr. Son, is just at the beginning to experience his own. Sprint Nextel was a warning shot, but his close ties to the crown prince of Saudi Arabia could become more of a liability and image problem than an advantage. His numerous investments in China and strong ties to some high-level Chinese bureaucrats and business people especially active in up-and-coming technologies such as robotics, A.I and big data bear future risks if you consider a new world full of patriotic and nationalist talks – plus protectionism.
He will be wrong, eventually and when he is wrong he will be wrong big time! Something investors should consider going into 2019.
We will revisit Softbank and Masayoshi Son and his fascinating story to fame and fortune. Subscribe to my email list and watch my YouTube reports and updates.
SOFTBANK TELECOM/MOBILE UNIT IPO
Location: Shiodome / Ginza Softbank shop
Tokyo Shiodome Building, SoftBank’s global headquarters in Tokyo.