July 29, 2020

Breakingviews: SoftBank rally makes case for more radical surgery

by Breakingviews.

SoftBank Group’s recent stock-price gains should give Chief Executive Masayoshi Son food for thought. An asset sale and share buyback plan, announced on March 23, has helped double the Japanese technology investment firm’s share price. That success strengthens the case for further dismantling SoftBank, whose equity is still only valued at half its almost $240 billion paper worth.

The share-price surge since March has two components. First, portfolio companies like Chinese e-commerce giant Alibaba increased in value. Second, Son shifted his strategy after pressure from activist investor Elliott Management. Rather than pouring money into startups, he’s selling assets like T-Mobile US and part of SoftBank’s Alibaba stake, and using the proceeds to buy back shares and reduce debt. The new focus has narrowed SoftBank’s discount to net asset value to roughly 50% from more than 70% in mid-March.

The gap may shrink further: as of June 30 SoftBank still had about $17 billion of capacity under buyback programmes unveiled this year. But it’s unlikely to close entirely. Fellow holding company Prosus, which owns a big chunk of Tencent, another Chinese technology giant, has on average traded at a 30% discount since listing in September, UBS reckons. SoftBank’s structure is more complicated, so it may be unable to achieve that small a discount. Even if it could, the company’s equity would still be worth $70 billion less than the underlying assets, after subtracting debt.

The best way to close the gap is to keep shrinking the portfolio. Selling or floating chipmaker Arm would help. So would shrinking the holding in SoftBank’s eponymous Japanese telecommunications operation, which accounts for 13% of the group’s portfolio.

But the real value lies in offloading Alibaba. At almost $170 billion, or close to 60% of Son’s portfolio, the stake is worth more than SoftBank itself. A clean solution would be to hand it to SoftBank shareholders. Alternatively, Son could sell shares back to Alibaba, or on the market. That would mean accepting a modest discount, and proceeds would be subject to tax. But the move would still create value given SoftBank’s huge discount.

Son may balk at such a plan. But it’s only the logical extension of his hitherto successful strategy of cashing in successful bets. The question investors should be asking is: why stop now?

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