SoftBank trades well below the value of its assets, including equity in public companies like Alibaba Group Holding Ltd and Yahoo Japan Corp. The gap has actually widened in recent months to the point SoftBank’s market capitalization is less than half its holdings, worth at least $180 billion. Indeed, SoftBank’s was little changed in the past year, while its stake in Alibaba alone increased by about $60 billion. The stock rose as much as 5.1% in Tokyo on Wednesday ahead of a quarterly earnings announcement.
The discount frustrates executives at SoftBank. They track the changes on a weekly basis and are now planning to step up efforts to close the value gap, according to a person familiar with the matter. They plan to make more transparent how the planned $100 billion Vision Fund will benefit SoftBank and how its start-up investments are valued, said the person, asking not to be identified because the matter is private. Investors are desperate for more clarity.
“The portfolio has grown too broad," said Mitsushige Akino, an executive officer with Ichiyoshi Asset Management Co. in Tokyo. “Son needs to make it clear whether this is a telecommunications company or an investment fund."
Since its founding in 1981, SoftBank has grown from a software wholesaler into a global telecom and investment company. Son, who has said the information revolution is SoftBank’s core business, has used earnings from his telecom operations to fund investments in overseas technology companies. Last year, Son formed the Vision Fund, raising $93 billion from big backers including Saudi Arabia and Apple Inc.
Son is already examining one step that could clarify his company’s evolution. SoftBank is considering an initial public offering for its mobile phone unit. That would help draw a distinction between the telecom and investment businesses. Plus an IPO would raise capital and allow SoftBank to move some debt onto the phone unit’s books. “If anyone doubted the company’s direction, an IPO will clarify that," said Chris Lane, an analyst at Sanford C. Bernstein & Co.
It may also shift SoftBank’s investor base. Lane thinks one reason for the valuation gap is that shareholders are still largely telecom investors who want healthy dividend payouts, which SoftBank doesn’t pay. A mobile phone IPO would allow those investors to get the business—and dividends—they want, while technology investors focused on growth could buy into SoftBank Group and its start-up investments. “Telco investors shouldn’t be buying this stock, tech investors should be buying it," he said.
A second step Son could take to address the value gap is provide detailed information about the Vision Fund. The billionaire made about 100 investments last year and has stakes in preeminent start-ups, such as Uber Technologies Inc., China’s Didi Chuxing and India’s Flipkart Online Services Pvt. But it’s not always clear when SoftBank cuts a deal itself and when the fund does—and how much of each start-up it owns.
Investors also want to know the fund’s fee structure, the company’s valuation of investments and how it tracks gains and losses over time, according to Anthea Lai, a Bloomberg Intelligence analyst. “For a conglomerate to narrow a discount, it needs to make it easy to value the subsidiaries," Lai said. “And the most difficult one to value is the Vision Fund."
SoftBank is planning to improve disclosure surrounding the Vision Fund when it has its final close, now expected in March, the person said, without detailing all the changes.
A third step to address the gap would be selling off more investments. SoftBank’s stake in Alibaba alone is worth about ¥15 trillion ($138 billion), far more than SoftBank’s own market value. SoftBank also took a stake of just less than 5% in chipmaker Nvidia Corp. last year, which would be worth more than $6 billion at current prices. Son needs to be more clear about returns on his investments and when shareholders can expect him to sell assets, Ichiyoshi Asset’s Akino said.
Such sales would give Son more money for shareholder returns. The most direct route to narrowing the valuation gap would be to purchase the company’s own stock, according to Atul Goyal, an analyst at Jefferies Group. Buying back even 2% of outstanding shares would send a strong message to the market, Goyal said, though he thinks the likelihood is low.
SoftBank’s last buyback was in February 2016, when it announced plans to spend as much as ¥500 billion to acquire about 14% of shares. The stock more doubled over the following 12 months, rebounding from a three-year low.
In the meantime, Son is showing no sign of slowing down. Last month, the Vision Fund agreed to invest $300 million in Wag Labs Inc., a start-up that uses a smartphone app to connect dog walkers with dog owners, and led an $865 million investment in Katerra Inc., a construction-technology startup seeking to shake up the building industry.
“Son is looking for something that can become the new core of the company," Akino said. “Many investors continue to believe in him, but they want more clarity on where he is heading. And they don’t want to wait too long." Bloomberg