Softbank’s Brexit discount makes ARM a compelling buy

For SoftBank, ARM looks like a smart investment that the pound’s decline made smarter


SoftBank’s to buy ARM Holdings is the biggest deal since the Sprint purchase was announced in 2012, and it’s being done at a premium of 43%. Photo: Bloomberg
SoftBank’s to buy ARM Holdings is the biggest deal since the Sprint purchase was announced in 2012, and it’s being done at a premium of 43%. Photo: Bloomberg

Hong Kong: SoftBank is set to fork out $32 billion for the British chip designer ARM Holdings, just one week after Chinese billionaire Wang Jianlin’s Dalian Wanda Group sealed a $1.2 billion deal to buy the UK’s Odeon & UCI Cinemas Group, citing the cheaper pound.

Sterling is now down 7.4% against the yuan this year, chiefly because of the 23 June vote to leave the European Union, and has fallen 10.3% against the dollar — and a massive 21% against the yen. That left Cambridge-based ARM, whose stock has risen 17% in pound terms since the referendum, still looking like a good bet.

That’s because it’s a bet on the future, in particular the so-called internet of things. ARM isn’t the world’s biggest chip designer, but it has been among the nimblest, shifting into smartphones while the likes of Intel remained more dependent on computers. As smartphone sales slow, ARM is selling licenses for chip designs that can boost computing power in everyday devices ranging from “connected” beds to farm sensors. ARM also has a tiny debt load of 9.5 million pounds ($12.6 million) at the end of last year.

This is SoftBank’s biggest deal since the Sprint purchase was announced in 2012, and it’s being done at a premium of 43% — on the face of it, a massive strain on the Japanese company’s total debt of about ¥11.9 trillion ($112.8 billion) at 31 March.

SoftBank shares have fallen in the past year as the company reeled from losses at Sprint, and efforts to turn around the US wireless carrier forced the company to sell almost $10 billion of its stake in a much more successful asset, the Chinese e-commerce giant Alibaba, last month.

Affordability isn’t necessarily a problem for SoftBank. The stock dipped after founder Masayoshi Son’s heir apparent Nikesh Arora abruptly stepped down the day before the UK referendum. But last month, the company sold its majority stake in Supercell, the Finnish maker of the popular Clash of Clans game, for $8.6 billion. Proceeds from that deal, and from the Alibaba disposal, should be booked this year.

And SoftBank still has almost $60 billion in Alibaba stock, Japanese mobile operations that make money, and 43% of the country’s biggest and most profitable search engine, Yahoo Japan, according to Bloomberg Intelligence analyst Michelle Ma.

Crucially, SoftBank also has ¥2.6 trillion in cash, and operates in a country with negative interest rates.

ARM isn’t cheap: It’s trading at 49 times current earnings, compared with Intel’s 14.4 times. Only much smaller Chinese peers like Zhuhai Orbita Control Engineering, at 145 times earnings, are more expensive.

Unlike Sprint, however, which was struggling before SoftBank bought it, ARM looks like a smart investment that the pound’s decline made smarter. Bloomberg

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