SoftBank ready to do deals as shares soar to 20-year high

Two months since Masayoshi Son suggested that he was misunderstood like Jesus Christ, the billionaire founder of Japan’s SoftBank has performed at least one miracle: resurrecting its share price.

Shares in the Tokyo-listed technology conglomerate have risen 143 per cent in value since hitting a panic-inducing low in mid-March.

They now sit at a 20-year high, while some of most high-profile investments in its $100bn Vision Fund, such as Uber and Slack, have seen their share price double in the same period.

New version of SoftBank strives to get back on track

After selling off assets and reviewing its investments with bankers, including the $32bn chip designer Arm, SoftBank is ready for another round of dealmaking.

“There are incredible investment opportunities that are opening up for companies that are sitting on enough dry powder to take advantage,” said Marcelo Claure, one of Mr Son’s trusted lieutenants, in an interview over Zoom from Aspen, Colorado. “We’re a lot more cautious . . . but it feels a lot better to be in the position where we are today.” 

Mr Claure, who joined SoftBank in 2013 after it acquired telecoms group Brightstar and is now its chief operating officer, added that SoftBank was “better positioned than it’s ever been” to do deals.

“I don’t think there has ever been a stronger SoftBank than the SoftBank we have today in the history of SoftBank,” he said.

If a renewed spell of dealmaking is on the horizon, the Bolivian-American executive was at pains to spell out all of the self-care that SoftBank has undergone in recent months to put Mr Son in that position.

In particular, he underlined the importance of closing in April a difficult merger between Sprint, the SoftBank-controlled US mobile operator, and its larger rival T-Mobile at the third attempt.

Last month, SoftBank, which had been struggling with Sprint’s heavy debts and flagging fortunes for years, navigated a restrictive lock-up arrangement to raise $23.2bn from selling part of its stake in the combined company.

After also selling down its stakes in Alibaba, the Chinese ecommerce group and its Japanese telecoms business, SoftBank is 90 per cent of the way to raising the $41bn it promised it would spend on buybacks and reducing its debt.

The disposal programme, announced in mid-March, followed a harrowing weekend in which SoftBank’s plunging share and bond prices saw Mr Son consider whether he should try to take the group private.

“Crisis gives you an opportunity to act decisive, to act bold and to act differently. We were in the middle of the financial crisis and of the pandemic, with a tremendous amount of unknown,” said Mr Claure.

“If you look at the history of SoftBank, traditionally, we’ve been buyers, we’ve been investors. We hardly ever have been sellers . . . We made a very bold decision that we were going to monetise some of our assets.”

The measures appear to have gone in a long way in restoring investor confidence. SoftBank’s market value has climbed to $128bn from a low of $51bn on March 19.

The price of a $2.75bn perpetual bond — which is higher risk for investors as SoftBank is never obliged to repay it — has rebounded to 93 cents on the dollar, having plunged as low as 67 cents in March.

Line chart of 6% coupon, perpetual bond (cents per $) showing SoftBanks's debt rebounds

Oliver Matthews, analyst at brokerage CLSA, said the share price gains — driven partly by Alibaba’s shares rising to all-time highs — have narrowed the discount between a sum of the parts valuation of SoftBank’s holdings and its equity valuation from about 75 per cent to 40 per cent.

“The stock has gone from outstandingly cheap to cheap but investors have yet to actually price in the asset sales, the share buybacks and the debt reduction,” he said.

Mr Claure’s attention has shifted to Arm Holdings, which Mr Son has previously said is the centre of his vision for an era where machines and humans interact ever more closely.

But last week, SoftBank said it had cut an internet-of-things business from Arm and transferred it to a new company under its control. Its ownership will be split just like that of Arm, with SoftBank controlling 75 per cent of the business and the remainder sitting in the Vision Fund. 

The decision stripped Arm of what was meant to be the high-growth engine that would power it into a 5G connected future. But Mr Claure argued that the IoT business was a high-cost distraction that dragged on Arm’s financial results and would be better served under separate management. 

Column chart of Operating income ($bn) showing SoftBank earnings tumble

After the split, he said Arm would be more focused on its core business of chip design and on track for an initial public offering that will come in the next few years. “When it is time to do an IPO is when we would have realised most of the value. It’s fair to say that I don’t see Arm as a public company in the next 12 months.”

One person with knowledge of SoftBank’s decision-making said it had also hired Goldman Sachs to assess all options for Arm, including a potential full or partial sale after receiving expressions of interest. The review was first reported by the Wall Street Journal on Monday.

The Vision Fund’s fortunes have also benefited from the recovery in US stock prices for technology-orientated companies and the reopening of the US market for initial public offerings. 

Following a successful market debut this month, SoftBank’s $300m investment in home insurance start-up Lemonade is worth more than $1bn. Other companies in its Vision Fund portfolio are eyeing a public listing, including DoorDash, the lossmaking US food delivery start-up, and oncology drug developer Relay Therapeutics.

But Mr Claure admitted there had been mistakes. He was one of a small cadre of SoftBank executives who last year invested alongside Abu Dhabi’s Mubadala in a €900m convertible bond in Wirecard, in a vote of confidence in the German payments company even as it faced questions over its accounting. 

Wirecard collapsed into insolvency last month after admitting a €1.9bn hole in its balance sheet, wiping out hundreds of millions of dollars in paper profits for the SoftBank executives and Mubadala.

The soured deal raised questions over SoftBank’s due diligence and the risks to its reputation from the decision to partner with a company dogged with allegations of accounting fraud.

“I can assure you that whenever the transaction was entered with Wirecard, we didn’t have the slightest idea,” said Mr Claure, adding that they placed their faith in the audit opinion of EY when making the investment. “We thought the company was right. And unfortunately, that one didn’t go through the right way.”

He added that arguably the company’s biggest error, sinking more than $10bn into the office-sharing group WeWork, was turning itself around and that his team would have achieved “mission impossible” by making it cash flow positive next year.

“I think the beauty of SoftBank and this management team is that we can learn from our lessons. We are going to be better the next time we do it,” Mr Claure said. “Sometimes things work out the way you want it to work out and sometimes these things don’t work out. One big issue is to learn from those mistakes and be sure we never make them again.”

Additional reporting by Robert Smith