Masayoshi Son's SoftBank Group long ago established its reputation as a visionary, value-creating investor. Perhaps it’s best known deal was its savvy backing of a then-nascent Alibaba – now a worldwide internet titan – in 2000. But its labyrinthine structure, leverage and lack of disclosure on the how it collects fees for managing its $93 billion Vision fund are own goals that detract from its value.
Apparently investors think SoftBank Group itself is worth less than half the sum of its total assets, even before taking into account its extensive holdings in unlisted entities. Although stock markets often value a diversified group of businesses and assets at less than the sum of its parts – the so-called conglomerate discount – a net asset value (NAV) discount as wide as 52% is simply too deep to ignore.
Indeed, the NAV as calculated by broker Jefferies only takes into account the value of five major assets: the domestic telecoms business (SoftBank Corp), a stake of around 30% in Alibaba, approximately 84% of Sprint, ARM Holdings and about 42% of Yahoo Japan. The ugly truth, however, is that the company’s stake in Alibaba alone is now worth more than its own market cap.
The discount would be even steeper if one adds in the value of its billions of dollars worth of investments in unlisted entities, such as ride-hailing service platforms Uber, Didi Chuxing, Grab, and Ola, or Indonesian online marketplace Tokopedia.
The question for investors is: what can SoftBank do to rein in the deficit?
A first step is to list its domestic telco subsidiary, and the company announced it was preparing to do so in a February 7 statement.
“Through the listing of SoftBank Corp shares, SoftBank Group and SoftBank Corp expect that the respective roles and valuations of SoftBank Group, the parent company … will be clear,” the statement said. SoftBank’s listed holdings tallied more than ¥18 trillion ($167.04 billion) as of February 7, as assessed by the company, which had a market cap of around ¥9.6 trillion as of that
However, SoftBank’s decision to list its main cash cow is unlikely to completely close the discount Jefferies analysts noted in a January report, after Japanese business newspaper the Nikkei reported rumours of the listing.
Spinning off and listing its most profitable unit “will not be sufficient to bridge the significant gap between NAV and the share price”, given how deep the gap is wrote Atul Goyal and Zhang Chengyao at Jefferies.
That gap is justified given the group’s increasingly complicated results and capital structure, complex loop of fund flows, and over-leveraged finances.
When it comes to unlocking value in the short term, two options immediately stand out: share buybacks and more transparency on fees from its private equity partners.
TOO VISIONARY TO VALUE?
Son likes to talk up his vision of building an empire so great that it will sustain itself for three centuries. To back up this ambition, Son has created a $93 billion Vision Fund – including more than $65 billion of other people’s money.
The idea is to invest worldwide in communications, the internet, artificial intelligence, smart robotics and the internet of things which SoftBank has dubbed SoftBank Synergy Group .
Son said during a recent investor briefing. “I want to build an organisation model that keeps growing for 300 years.”
So far, the Vision Fund has deployed more than $35 billion of this massive war chest, into ventures such as ride-hailing companies, online car dealers and, most recently, a dog-walking platform. Looking even further into the future is a $25 billion commitment – including $15 billion from SoftBank's own balance sheet – to develop a future, AI-centric city in Saudi Arabia.
Let’s assume for one moment all of the big-ticket investments are sensible and will yield huge value in the future. But how many SoftBank investors, institutional or retail, will be thrilled by the prospects of returns that may not be realised in their lifetimes? After all, fund managers are generally assessed on a quarterly basis. On the flip side, investors have to take into account any losses potentially arising from the mega fund’s mistakes.
So what could help investors get a clearer picture of the nascent Vision Fund's performance? How about a little fee disclosure ...
Although SoftBank has set out the fund’s business model and assumption-based accounting treatment, investors know little about its fee arrangements. “These complex fund flows are creating a loop with little transparency of how the Vision Fund benefits Softbank Group or its shareholders,” according to Jefferies.
SoftBank acts as the general partner of the Vision Fund while also committing capital as a limited partner in the fund. It is unclear if and how much SoftBank charges itself for managing the fund and performance fees. Neither is it clear if all limited partners are charged the same amount.
SoftBank also has a habit of buying assets with other parts of the group and transferring them into the Vision Fund.
Insight into these practices would help investors’ understanding which could lead to a narrowing of the conglomerate discount.
BUFFETT OPTIONS
Another viable option could be taking a leaf out of Warren Buffett's book. Berkshire Hathaway has made clear it will launch share buybacks if its stock falls below 1.2 times book value of equity per share. Goyal and Zhang at Jefferies alluded to that, saying what they “would like to see is use of [IPO] proceeds to buy back Softbank Group shares. But the probability appears very low, if not zero” judging by the company’s ambitious investment spree.
According to Nikkei, “the group does not plan to use the proceeds from the IPO to pay down debt, instead eyeing investment in growth, such as buying into foreign information technology companies.”
SoftBank did not respond to FinanceAsia's request for comment on its plans for the IPO proceeds.
But while the grand vision is important – and impressive – investors may not want to wait for it to come to final fruition.
