Softbank Corp. (9984)’s Masayoshi Son has a history of picking winners. Investors say his latest choice may not be a repeat performance.
Those past successes didn’t convince investors that Son’s strategy of entering the U.S. mobile-phone market by buying Sprint Nextel Corp. (S) makes sense. Softbank shares plunged the most on record, wiping $1.3 billion from Son’s net worth, after it was first reported to be in acquisition talks on Oct. 11. Shareholders are concerned the $34 billion company may be saddled with debt or dilute earnings by issuing new shares to fund multiple acquisitions announced in the past month.
“Son’s a gambler,” said Hideto Fujino, chief investment officer at Rheos Capital Works Inc., which manages about 25 billion yen including Softbank shares. “Softbank’s balance sheet will be damaged, and its earnings may be hit. It isn’t clear that Son can improve on an unprofitable Sprint.”
Softbank, Japan’s third-largest wireless carrier, will pay $20.1 billion for a stake of about 70 percent in Sprint Nextel, Son’s company said in a statement to the Tokyo Stock Exchange today. Softbank will pay $12.1 billion to Sprint shareholders in the deal, which includes $8 billion of new capital and is expected to close in the middle of next year.
Softbank shares fell 5.3 percent to 2,268 yen today in Tokyo trading.
Son is pursuing an acquisition strategy that counts on smartphone users migrating to the faster wireless networks owned by Sprint and Japanese competitor eAccess Ltd. to surf the Web and download videos and music. Softbank is looking to ride the fastest growth in mobile communications since 3G started rolling out a decade ago.
“By buying a telecom company in the U.S., Softbank would not only have to bear the acquisition cost but also face rapid changes in the global economy,” Mitsushige Akino, who oversees the equivalent of about $600 million in assets at Ichiyoshi Investment Management Co. in Tokyo, said before the announcement. “Softbank’s stock is down on concerns about the financial burden.”
Son, 55, also seeks to benefit from long-term evolution technology’s price premium over current tariffs and a belief that more devices will be connected wirelessly beyond traditional smartphones. Operators can charge about 20 percent more for LTE than current third-generation technology, according to ABI Research.
LTE subscriptions quadrupled this year to 73 million and are expected to reach 1.2 billion by 2016, according to projections from IHS iSuppli. Having some of the world’s largest handset makers -- Apple Inc. (AAPL), Samsung Electronics Co. (005930) and HTC Corp. -- support the technology helps ensure consumer interest.
Yet some investors said Softbank’s pursuit of Sprint may be flawed, and the company may be overextending itself. Shares fell a record 17 percent to 2,395 yen on Oct. 12, and Standard & Poor’s Ratings Services placed its BBB long-term corporate credit and senior unsecured debt ratings on Softbank on creditwatch with negative implications.
‘Market is Different’
“The transaction, if it proceeds, may undermine Softbank’s financial risk profile, in our view,” S&P said in the statement.
Softbank had an Ebitda margin, or the percentage of profit before interest, tax, depreciation and amortization to sales, of 31.65 percent in the fiscal year ended in March, according to data compiled by Bloomberg. That exceeds AT&T (T)’s 24.60 percent, Verizon’s 27.31 percent and Sprint’s 15.06 percent.
After the decline on Oct. 12, Softbank is valued at 2.65 trillion yen, according to data compiled by Bloomberg. That’s down 86 percent from its peak of 19.83 trillion yen on Feb. 18, 2000.
“I don’t know why he wants to take such a risk,” Nobumichi Hattori, the former Japan head of mergers and acquisitions at Goldman Sachs Group Inc., said before the deal was announced. “He probably thinks it’s a matter of course. But the market is different between the U.S. and Japan.”
Son founded the company in 1981 as a software wholesaler -- a “bank” of software -- before focusing his attention on the rising popularity of the Internet.
He invested $2 million in Yahoo! Inc. in 1995, and the two companies set up a Japan venture in 1996. Softbank invested 120 million yen for a 60 percent stake, and the company now owns 42 percent of Yahoo Japan, which has a market value of $20.5 billion.
In 2000, Softbank invested $20 million in Alibaba.com, an e-commerce website. Son called the Hong Kong-based company “one of the most compelling Internet success stories to emerge from China.”
He later said Softbank booked “tens of billions of yen” in gains from the initial share sale of Alibaba.com Ltd. in 2007.
Softbank now owns about 30 percent of Alibaba Group Holding Ltd., China’s largest e-commerce provider and whose chief executive officer, Jack Ma, sits on Softbank’s board. Alibaba agreed in May to repurchase about a 20 percent stake in itself from Yahoo for about $7.1 billion ahead of a potential initial public offering.
That deal valued Alibaba at about $35 billion.
“Son is always thirsty,” said Shinichi Sano, whose biography of the billionaire was published last year. “He doesn’t feel like living without gambling.”
His biggest deal came in 2006, when he bought Vodafone Group Plc’s mobile-phone business in Japan for 2 trillion yen. The company raised 1.45 trillion yen through the sale of asset- backed debt in September 2006 to fund its purchase, and Son used 107 million of his own shares as collateral, or about 10 percent of the company’s outstanding stock at the time, according to a financial filing.
Softbank lost almost a third of its market value in the three months after announcing its plan. Analysts questioned Son’s strategy, citing an increase in debt and the possibility that he overpaid for Vodafone.
Some of those same questions were raised after the announcement of the Sprint talks.
“The deal would thus represent a watershed for Softbank’s balance sheet and mobile telecom strategy, and we think the uncertainty here could weigh heavily on the share price,” said Hitoshi Hayakawa, a Credit Suisse Group AG analyst.
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