Tech

Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

From Uber Technologies Inc. to Ola and Alibaba Group Holding Ltd., SoftBank Group Corp. is investing in all the hot unicorns. But why aren't Masayoshi Son's own shares feeling the love? 

The combined market value of the stakes in publicly listed companies that SoftBank holds has reached 19.2 trillion yen ($170.5 billion), a 90 percent premium to the Japanese technology conglomerate's own market capitalization.

According to SoftBank's calculations, selling its 29 percent stake in Alibaba and 43 percent ownership in Yahoo Japan Corp. would allow it to realize 16.3 trillion yen in capital gains.

But that's easier said than done.

Similar to the Yahoo Holdings Inc. spinoff Altaba Inc., what SoftBank owns in Alibaba isn't the liquid American depository shares listed in New York, but "registrable securities" that lay claim to Alibaba's Cayman Islands-based holding company.

In a 2012 filing, Yahoo set out the procedure for converting these securities into ADRs: After the New York IPO, Alibaba "shall use its reasonable best efforts to qualify for registration on Form S-3 or Form F-3." Once Alibaba becomes qualified, then the "holders" -- in this case, Yahoo and SoftBank -- can "request registrations" in New York, and then sell their shares to the public.

In June last year, SoftBank said it would raise $8.9 billion offloading some of its Alibaba securities. Alibaba itself purchased $2 billion, paying $74 a share. A further $1 billion was raised via sales to two state-owned investment firms in Singapore, and another $400 million from selling the shares to Alibaba senior executives. The remaining $5.5 billion was offered in the form of debt that can be converted back into the same kind of Alibaba securities in June 2019.

One can't help wondering why SoftBank went through such a roundabout process. Why didn't it just proceed to register the securities in New York and sell to the public?

And how does one define "reasonable best efforts?" According to index provider MSCI Inc., Alibaba ranks at the very bottom when it comes to corporate governance among the 149 companies in its benchmark MSCI China Index, even worse than state-owned enterprises. As Alibaba's ADRs reach record highs, does Jack Ma want a flood of new shares coming to market? The Chinese e-commerce giant is now valued at 36.4 times forward earnings on long-term growth of only 26 percent.

The Only Way Is Up, Maybe
Why would Alibaba's Jack Ma want a flood of new shares coming to market right now?
Source: Bloomberg

SoftBank's Yahoo Japan shares are also less liquid than one might think. SoftBank regularly uses the stock as collateral for bank loans, making Yahoo Japan's securities strategically more valuable than their market price alone.

Currently, SoftBank's 43 percent stake in Yahoo Japan is valued at 1.3 trillion yen. That sets a limit on how much Son can raise in debt by pledging the interest. But if Altaba sells, allowing SoftBank to increase its ownership, a much brighter picture emerges. Yahoo Japan is an internet company that generates almost 140 billion yen of cash from operations. At interest of 2 percent, those steady streams are worth 7 trillion yen. Banks could be persuaded to provide a lot more.

Tokyo Muscle
SoftBank's net debt is equivalent to almost 30 percent of the Tier 1 capital ratios at Japan's three megabanks
Source: Bloomberg

Gadfly has written that SoftBank's $88 billion of net debt is becoming too large for Japan's banking system. As Son continues his globetrotting, chasing hot assets with borrowed money, it's understandable Japan's lenders will want more collateral.

Son has made some savvy investments, but he doesn't have much of a track record when it comes to exiting. Perhaps that's because leaving is always the hardest part.

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

To contact the author of this story:
Shuli Ren in Hong Kong at sren38@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net