A phoneless vision
MENTION SOFTBANK and most Japanese people, understandably, think of telecoms - it is Japan’s third-largest wireless carrier. The company hopes to weaken that association. SoftBank is listing its telecoms arm; shares in the unit were due to begin trading on December 19th, after The Economist had gone to press. SoftBank Group was expected to raise ¥2.6trn ($23.4bn) by selling off just over a third of the company. It is selling 1.76bn shares for ¥1,500 each, making it Japan’s biggest-ever initial public offering and only just shy of the record set by Alibaba, a Chinese e-commerce titan in which SoftBank Group owns a stake of about 29%, in 2014.
That is good going for a firm whose earnings have been lacklustre and which faces big challenges. Providing mobile services is a lucrative affair in Japan - prices are far higher than in other developed countries. But it is also a mature business and the population is shrinking. SoftBank has a quarter of the market, trailing NTT DoCoMo and au. NTT DoCoMo has already said it will slash prices after pressure from the government to lower costs; the other two are likely to have to follow suit. Next year the trio will face new competition from Rakuten, a Japanese e-commerce giant that is about to become the nation’s fourth mobile-network operator.
Other problems are more particular to SoftBank. A service outage lasting over four hours, affecting 34m customers mainly in Tokyo and Osaka, sent its shares down by as much as 6% in trading on December 6th. And the firm has said it may have to spend money replacing all the hardware in its 4G and 5G networks that it gets from Huawei, one of its main suppliers, after Japan became the latest country to air security concerns about the Chinese firm.
Even so, the Japanese public, bombarded by TV advertisements for the listing, has flocked to buy shares. SoftBank benefits both from domestic investors’ lack of options and its own strong brand. For them, putting in ¥1,500 and receiving a relatively high dividend payout, of around 5%, with no currency risk is an attractive proposition. “Mrs Watanabe is looking at yield, not the fundamentals in the long term,” says Chris Lane, an analyst at Sanford C. Bernstein, a research firm, referring to the proverbial Japanese retail investor.
The IPO’s attractions are equally clear for Masayoshi Son, SoftBank’s founder, who is shifting his firm away from telecoms towards investing in tech entrepreneurs around the world. Through his Vision Fund, an investment vehicle financed in large part by Saudi Arabia’s sovereign-wealth fund, he has bought stakes in companies such as Uber, WeWork and Arm (a British chip firm). The IPO is a way to take some cash out of a part of SoftBank that is not growing as swiftly and to put it into racier bets, while retaining control.
Mr Son also hopes the sale may solve his main frustration since he veered away from telecoms to backing tech founders: that investors do not properly appreciate SoftBank’s transformation and that they therefore undervalue it. The company’s shares have been trading at a hefty discount, of around 40%, to the value of its assets. This discount arises in part because many telecoms-focused investors in the group are not thrilled to see their cash being funnelled into risky and opaque tech investments at high prices. Now these investors will be able to buy shares in a more predictable phone company while those with a higher risk appetite can stay with SoftBank.
Closing the discount depends on a number of factors, however. What happens to the group’s high level of debt will be critical. SoftBank has around ¥18trn of interest-bearing debt, or over six times its operating earnings, thanks partly to its acquisition of Sprint, an American telecoms firm, for $20bn in 2012. The risk the debt mountain poses is the concern most often cited by investors, says Mr Lane. Some of this debt will go to the separately listed mobile unit and may be “non-recourse”, meaning that SoftBank may no longer be liable for it if the subsidiary defaults. For now, Japan’s negative interest rates, adopted by the Bank of Japan in 2016 as part of its quantitative-easing programme, allow firms to borrow without worrying too much; they should remain for at least a year.
Critics complain, too, that Mr Son’s plans are wildly ambitious but unclear; and that “key man” risk around him remains too high. That suggests hopes for a re-rating of the parent’s shares may go unanswered. Investors in the mobile arm might face an additional governance risk, if the subsidiary tries to please its parent and majority stakeholder rather than ensure returns for minority shareholders.
As for the Vision Fund itself, Mr Son was criticised for failing to distance himself from Saudi Arabia when its crown prince, Mohammed bin Salman, was linked to the killing of a Saudi journalist in its embassy in Turkey in October. Startups might be more reluctant to accept Mr Son’s cash as a result, some rival tech investors say.
Early divestments from the fund seem to have worked well, however. When Walmart bought SoftBank’s stake in Flipkart, an Indian e-commerce firm, in May, it reportedly paid almost double what SoftBank did less than a year earlier. SoftBank invested in Uber at a valuation of around $48bn; reports suggest its valuation will be north of $100bn when it lists on the stockmarket, possibly in the first quarter of 2019. Next to that kind of money, the telecoms business, expected to make ¥700bn of operating profit this year, looks like small fry.