SoftBank's Post-Brexit ARM

The British chip designer is moving into the internet of things.
At Closing, June 20st
5.47 USD

Brexit may be turning into a deals bonanza for Asian buyers seeking quality franchises at decent prices.

SoftBank is set to fork out $32 billion for the British chip designer ARM Holdings, just one week after Chinese billionaire Wang Jianlin's Dalian Wanda Group sealed a $1.2 billion deal to buy the U.K.'s Odeon & UCI Cinemas Group, citing the cheaper pound.

Sterling is now down 7.4 percent against the yuan this year, chiefly because of the June 23 vote to leave the European Union, and has fallen 10.3 percent against the dollar -- and a massive 21 percent against the yen. That left Cambridge-based ARM, whose stock has risen 17 percent in pound terms since the referendum, still looking like a good bet.

That's because it's a bet on the future, in particular the so-called internet of things. ARM isn't the world's biggest chip designer, but it has been among the nimblest, shifting into smartphones while the likes of Intel remained more dependent on computers. As smartphone sales slow, ARM is selling licenses for chip designs that can boost computing power in everyday devices ranging from "connected" beds to farm sensors. ARM also has a tiny debt load of 9.5 million pounds ($12.6 million) at the end of last year.


While ARM Holdings' stock has increased, the pound has weakened against the dollar

Source: Bloomberg

This is SoftBank's biggest deal since the Sprint purchase was announced in 2012, and it's being done at a premium of 43 percent -- on the face it it, a massive strain on the Japanese company's total debt of about 11.9 trillion yen ($112.8 billion) at March 31.

SoftBank shares have fallen in the past year as the company reeled from losses at Sprint, and efforts to turn around the U.S. wireless carrier forced the company to sell almost $10 billion of its stake in a much more successful asset, the Chinese e-commerce giant Alibaba, last month.

Heavy Borrower

SoftBank's total debt levels have soared since 2012

Source: Bloomberg

Affordability isn't necessarily a problem for SoftBank. The stock dipped after founder Masayoshi Son's heir apparent Nikesh Arora abruptly stepped down the day before the U.K. referendum. But last month, the company sold its majority stake in Supercell, the Finnish maker of the popular Clash of Clans game, for $8.6 billion. Proceeds from that deal, and from the Alibaba disposal, should be booked this year.

And SoftBank still has almost $60 billion in Alibaba stock, Japanese mobile operations that make money, and 43 percent of the country's biggest and most profitable search engine, Yahoo Japan, according to Bloomberg Intelligence analyst Michelle Ma.

Crucially, SoftBank also has 2.6 trillion yen in cash, and operates in a country with negative interest rates.

ARM isn't cheap: It's trading at 49 times current earnings, compared with Intel's 14.4 times. Only much smaller Chinese peers like Zhuhai Orbita Control Engineering, at 145 times earnings, are more expensive.

Unlike Sprint, however, which was struggling before SoftBank bought it, ARM looks like a smart investment that the pound's decline made smarter.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Nisha Gopalan in Hong Kong at

    To contact the editor responsible for this story:
    Paul Sillitoe at

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