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Japan’s SoftBank Group has made a dizzying number of investments all over the world. Where this will take the debt-laden company is the topic of much debate. Adrienne Klasa reports.

A humanoid robot. The world’s biggest technology fund. A baseball team. A Silicon Valley unicorn. A Chinese e-commerce giant.

At first glance, none of these have much in common – but they are all pieces of the growing empire of SoftBank Group, the ambitious Japanese conglomerate led by Masayoshi Son.

SoftBank began in 1981 as a software and telecommunications company. It has since evolved to contain 761 subsidiaries (as of March 31, 2017), including US mobile carrier Sprint, internet company Yahoo! Japan and world-leading semiconductor firm Arm Holdings.

A taste for variety

Mr Son is a serial dealmaker with an appetite for risk and a habit of bemusing investors with disparate projects. According to Dealogic, SoftBank has been involved in deals totalling an estimated $145bn since 1995. It holds large stakes in technology giants Uber, Didi Chuxing and Alibaba Group. And it is the maker of Pepper, reputed to be the first humanoid robot.

Those watching the company speak of it with a mixture of exasperation and awe: exasperation at SoftBank’s underperforming stock, its heavy debt load and its endless stream of seemingly disconnected deals; awe at the scale of Mr Son’s vision.

“It takes a certain type of investor to be a SoftBank investor, just like it took certain kinds of investors to be in GE and IBM in their better days... or in Amazon in all the years when [CEO] Jeff Bezos was spending more and more money on crazy stuff,” says Erik Gordon, a professor at the University of Michigan’s Ross School of Business.

Worth the risk?

SoftBank’s most recent results show its operating profit rose by 24%. But it seems to have little interest in running a traditional business. Mr Son describes himself as having a 300-year business plan. He is also a risk-taker; he continues to make deals despite sitting on about $130bn in debt.

Both Moody’s and Standard & Poor’s cut SoftBank’s debt to junk status after the company purchased a 78% stake in Sprint for $21.6bn in 2013. But that did not slow SoftBank down. It bought UK-based chip designer Arm for $32bn in 2016, while in 2017 it spent $3.3bn buying Fortress Investment Group and invested $9.58bn in ride-sharing company DiDi.

Mr Son’s ambitions have come at a cost, however. SoftBank Group has the heaviest debt load of any listed company in Japan. Debt service costs have grown seven times over four years. He argues that debt is needed to deliver value.

“[From 2015 to 2017] we spent Y2000bn [$18.7bn] more yen in [debt], but as a result we have a Y7000bn increase in the assets of SoftBank. Wasn’t that a good thing?” Mr Son said during a presentation of the company’s 2017 results.

Still, the company says it plans to work towards moving its credit rating from discount to premium, and hopes a planned $18bn initial public offering for its domestic telecoms business will please investors who want to see more cash coming out of its assets.

Pushing the limits

Leaving its acquisitions to simply turn over profit is not SoftBank’s style. Arm is a case in point. After making profits in the first two quarters of 2016, it has swung to consistent losses since joining SoftBank in September 2016. Arm’s chip technology can be found in most mobile devices.

Heavy investment in R&D, and a 25% increase in headcount, are part of a typically ambitious strategy. “Arm and SoftBank have a bold vision of 1 trillion securely connected devices by 2035,” says Ian Thornton, vice-president for investor relations at Arm. He adds that as a standalone, the company makes money but SoftBank’s amortisation costs mask Arm’s profits.

Another deal that left some scratching their heads was SoftBank’s December 2017 purchase of Fortress Investment Group, for $3.3bn. The alternative asset manager’s main businesses are mortgage servicing and subprime lending – a far cry from the cutting edge of technology that SoftBank says is its focus. SoftBank also paid 39% above Fortress’s stock value on the deal.

In an interview with the New York Times, Rajeev Misra, CEO of SoftBank Investment Advisers, which oversees the group’s investment funds, argued that the combined value of Fortress and Vision Fund assets total about $140bn, a pool of resources approaching the levels of private equity giant KKR’s $168bn under management. “My vision is to become one of the largest managers of alternative assets in the world,” he said.

Visionary venture capital?

In May 2017, SoftBank announced the first close on its $100bn Vision Fund, the world’s biggest technology investment fund. “If superintelligence goes inside the moving device then the world, our lifestyle, dramatically changes,” Mr Son said at Mobile World Congress in February that year. “I truly believe it’s coming, that’s why I’m in a hurry – to aggregate the cash, to invest.”

According to company filings from February 2018, Vision Fund has raised $91.7bn so far. Its partner Delta Fund has raised $6bn. SoftBank committed $28.1bn and $4.4bn to each fund, respectively, while outside investors – including Apple, Saudi Arabia’s public investment fund, the United Arab Emirates’ sovereign wealth fund, Foxconn and Qualcomm – make up the rest.

Many doubted that SoftBank would be able to deploy capital on this scale and timetable, but it has managed so far. The Vision Fund has already invested more than $40bn in companies, including Uber (SoftBank is now its largest shareholder), US co-working company WeWork and Nvidia, an US chipmaker valued at 60 times its earnings.

Mr Son has also identified an investment thesis that fulfils the needs of a select few investors with a rarefied problem: an infinite time horizon and a huge amount of capital. “He has been masterful at creating a match that shields people from the career political embarrassment of the short-term fluctuations while you’re trying to get to the long term, and on a sufficient scale,” says Mr Gordon.

But others feel the fund’s purpose has become muddled. “The only question is: what is not in there? Maybe steel is not in there yet, and I should repeat ‘yet’,” says Atul Goyal, equities analyst at Jefferies.

This is not SoftBank’s first foray into venture capital. The company founded Softbank Capital in 1995, which has since been wound down. It made successful early investments in Yahoo!, Alibaba and the Huffington Post.

Alibaba the saviour?

Alibaba is SoftBank’s biggest win. After investing $20m in Jack Ma’s e-commerce start-up in 2000, SoftBank reaped $60bn when Alibaba listed in 2014. It sold $8bn in shares in 2016, but it still retains a 29% stake.

That Alibaba stake may be crucial to keeping SoftBank Group’s poor stock prices afloat: as of March 16, 2018, SoftBank’s Alibaba shares were worth 83% of the group’s listed market capitalisation.

The so-called ‘conglomerate discount’ – where the stocks of sprawling multinationals trade lower than more narrowly focused peers – averages 6% to 12% on Wall Street, according to the Harvard Business Review. SoftBank’s discount soundly beats this. The group’s holdings are estimated to be worth at least $180bn, yet it trades at about $90bn. “For SoftBank, you have to look at the stock price to see the disconnection in the business, and that is not a good sign, because the stock price continues to be weak,” says Mr Goyal.

Part of the problem is the company’s sheer intricacy. “SoftBank’s capital structure is becoming more complex,” says Motoki Yanase, a vice-president at Moody’s Japan.

Mr Misra, who heads SoftBank’s investment arms, is known as a master of intricate financial instruments – a skill set that appeals to Mr Son. This can also lead to problems. As global head of the fixed-income division at Deutsche Bank, Mr Misra oversaw the creation of complex mortgage securities, instruments thought to have contributed to the global financial crisis.

Show them the money

SoftBank’s plan to list its Japanese telecoms unit – SoftBank Corporation – will allow it to get some cash out of the business while providing a window into the company’s value for investors.

The sale is not yet confirmed, but investors are expectant. Stocks in the parent company rose 6% when the idea was floated in January. “I think it makes sense to take some cash out of that business,” says Mr Gordon.

Creditors may not agree. The Japanese unit currently guarantees debt across much of the rest of the group and is viewed as its cash cow. “Depending on the flotation percentage, SoftBank Group will lose some of the dividends it has been getting from the domestic mobile company that has been its major cashflow generator,” says Mr Yanase at Moody’s.

The jury is still out on whether SoftBank is led by a visionary who can deliver the world’s next great company, or whether it is simply being driven too far, too fast. The company may not present an easy bet for the average investor looking for quarterly dividends, but if Mr Son’s vision pans out, his empire could become a corporate titan for the 21st century.

“All great companies and industries were built in the face of eye-rolling and huge risk,” says Mr Gordon. “I think SoftBank is one of those companies where if it works – and we’re not done yet – it will be one of those that was scary, scary, scary [for investors] and then became a monster.”

This article is sourced from fDi Magazine
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