SoftBank Group Corp. Chairman and CEO Masayoshi Son speaks during a press conference on May 9, 2018 in Tokyo, Japan.
Tomohiro Ohsumi | Getty Images
Perhaps coronavirus will just be a blip in the company’s long-term plan for world domination. Perhaps SoftBank’s vision of investing in artificial intelligence and other dominant technology companies will pay off in the long run, just as billionaire CEO Masayoshi Son envisioned when he kicked off the Vision Fund, the unprecedented $100 billion private equity fund that has invested in about 90 companies over the past three years.
But Monday’s news that SoftBank is planning to sell up to $41 billion in assets to shore up its balance sheets through a combination of stock and bond buybacks, debt redemptions and cash on hand should be concerning news for investors. While SoftBank shares jumped 19 percent on the news, the company is selling into a market downturn and acknowledging a need to restore a cash balance — two signs of weakness. Before Monday, SoftBank shares traded at a 73% discount to aggregate value of its owned assets, the largest discount in the company’s history.
“This program will be the largest share buyback and will result in the largest increase in cash balance in the history of SBG, reflecting the firm and unwavering confidence we have in our business,” Son said in a statement. “This will allow us to strengthen our balance sheet while significantly reducing debt. Moreover, the monetization of assets represents less than 20 percent of the company’s current asset value.”
Some of the assets SoftBank could sell are part of its 26% stake in Chinese e-commerce company Alibaba, worth about $130 billion; publicly traded stakes in Uber, Guardant Health and Sprint (which is in the process of merging with T-Mobile); and SoftBank Corp. (separate from SoftBank Group), which has majority ownership of Yahoo Japan. A SoftBank spokesperson declined to comment on which assets will be sold.
Still, it’s not ideal to sell while asset values are falling to secure cash for investments made near the market’s top. The main problem for SoftBank is its ambitious Vision Fund, which has posted back-to-back quarterly losses in operating profit, wiping out the company’s overall profit in both quarters.
The big risks: Ride-sharing, WeWork
But Son has expanded his empire in the past couple of decades, acquiring more than 80 percent of Sprint and subsequently merging it with T-Mobile, buying semiconductor company ARM for $32 billion in 2016, discussing a potential acquisition of U.S. cable company Charter, and investing more than $15 billion on WeWork and Uber. In the process, SoftBank has become a technology and telecom holding company. Many of its largest bets — ARM, Uber, WeWork, Didi Chuxing — are housed (at least in part) within the Vision Fund, which gets some of its funding from outside investors such as Saudi Arabia’s Public Investment Fund and Abu Dhabi state fund Mubadala Investment Co.
SoftBank’s primary need for cash stems from owning large stakes in dozens of private companies that likely won’t have an exit plan in the public markets for the perceivable future.
The Vision Fund owns large stakes in cash-guzzling ride-share companies such as Didi, Grab, and Ola, which are all still private and will all need exit strategies, either through going public or selling. Coronavirus quarantines are already severely impacting ride-sharing companies as consumers stay home. Uber shares are down about 45% in the last month — and SoftBank still owns about 16% of Uber.
WeWork is also particularly at risk for an extended quarantine, as people will stay away from shared office spaces. SoftBank is already trying to extract itself from part of that investment by attempting to pull away from a $3 billion tender offer. SoftBank still plans to extend $5 billion in debt to WeWork, people familiar with matter told CNBC last week, and the tender offer “has no impact on SoftBank’s commitment to WeWork or on the financial strength of the business,” according to a spokesperson.
Beyond the Vision Fund’s largest investments, a prolonged downturn will require many other unprofitable, negative cash-flow companies to seek additional funding. SoftBank is the largest shareholder for the majority of companies in the Vision Fund. That means it will be asked for follow-on investments, of which it has dedicated about $20 billion of the $100 billion. The Vision Fund is counting on companies, such as construction startup Katerra, which took $865 million from the fund, to pay off with big exits even though they haven’t yet turned a profit. Other biotech companies in the portfolio may benefit if they can help with coronavirus recovery. But seeing a payoff will require patience, which will in turn require investors to have patience in SoftBank.
Several Vision Fund partners have expressed concern internally that $20 billion wasn’t enough reserve capital for a fund with a 14-year lifespan, CNBC reported earlier this month. Those partners’ beliefs appear prescient today.
“Softbank’s current buyback will be funded by selling assets that the market is discounting at 60%+ for full price, whilst de-leveraging should mitigate worries on balance sheet stress as private equity valuations fall,” wrote Kirk Boodry, an analyst at Redex Holdings, in a note to clients.
Vision Fund head Rajeev Misra told CNBC earlier this year that he expects “dozens” of his portfolio companies to go public in the next 18 to 24 months, proving his investment strategy to be successful and leading to new limited partner investment for Vision Fund 2.
Just weeks after that interview, Misra’s comments already appear considerably more uncertain. Airbnb, which had planned to go public this year, is now exploring other options to raise cash including a new round of funding, CNBC reported last week. SoftBank is not an investor in Airbnb, but if a bellwether company like that is considering taking external funding, it signals weakness in the overall IPO market — especially for companies that will see major revenue declines with quarantines in place. If an IPO window is closed for all of 2020, Vision Fund companies will need more capital, and SoftBank may be forced to walk away from investments instead of funding them all.
“If the markets go into a prolonged slump of 12 to 24 months and there’s not access to public markets, we’ll have to look at raising additional capital at the company level,” Jeff Housenbold, a managing director at the Vision Fund, told CNBC earlier this month. “There’s debt, there’s equity players, there’s mergers and acquisitions.”
SoftBank is counting on the next 18 to 24 months to prove its strategy will be a winner for investors. But if coronavirus pushes the markets into a deep recession, it’s far more likely that timeline will be more about survival and less about succeeding.