Pots of cash

Masa and the Goose

A telco offering would showcase a strong business and help repay debt.
Pau Barrena/Bloomberg

Masayoshi Son wants to sell the goose. At least, some of it.

As much as people love to talk about the founder of SoftBank Group Corp. being a masterful investor -- and inevitably point to Alibaba Group Holding Ltd. as evidence -- the reality is that SoftBank is all about POTS.

It's not sexy, but SoftBank's Plain Old Telephone Service in Japan is what pays the bills. It accounts for just 36 percent of revenue, behind 39 percent from Sprint Corp., yet delivers 67 percent of the mothership's operating income.

SoftBank's Domestic Telco Revenue ...

Sprint (U.S.) and SoftBank's domestic phone businesses garner approximately equal sales

Source: Bloomberg

Sprint is such dog of a company that it ranks third behind even Yahoo! Japan Corp. in terms of contribution to SoftBank's bottom line. 

... Makes Most of the Money

Two-thirds of SoftBank's operating profit comes from one business

Source: Bloomberg

So when the Nikkei newspaper reported over the weekend that Masa may list his domestic telco locally and overseas, it got me thinking: What's left? A hunk of debt, that's what.

SoftBank Group has almost $50 billion in debt coming due over the next six years, according to Bloomberg data. Nikkei reports that an IPO could raise around 2 trillion yen, which is about $18 billion, while SoftBank would still hold onto 70 percent. Such a listing is one option, the company said in a response to the Tokyo Stock Exchange on Monday.

Balance Sheet

SoftBank has almost $50 billion of debt coming due over the next six years

Source: Bloomberg

That would cover most of the debt due in the next three years. The group threw off $5.4 billion in free cash flow in fiscal 2017, but that seems almost an aberration given that it was negative the prior three years.

Yet, according to Nikkei, the proceeds wouldn't be used to pay off debt but instead fund further investments in the likes of foreign technology companies, which looks suspiciously akin to the mandate given to SoftBank Vision Fund.

Even then, it's all one big pot of money and anything that firms up the balance sheet will help SoftBank deal with all that debt.

Listing overseas, in addition to Tokyo, would be a great way to unlock the value of SoftBank's local phone business and bring in cash. Telcos, both regionally and globally, haven't had a great time recently. The MSCI World Telecom Service Sector Index returned just a smidge over 2 percent the past two years. The Asia telecom index returned 7.5 percent in 2017, lagging the broader MSCI Asia-Pacific's 29 percent return.

That doesn't bode well for a rich valuation. However, the business's 22.5 percent operating margin is well above the average 16.3 percent regionally and 15.8 percent globally. Add to that the fact there's been a dearth of good mobile telco IPOs recently, and there's every chance that a SoftBank spinoff and listing would attract plenty of interest.

Likely to excite investors even further is the group's need for cash to service that debt. As a separate entity, money flowing into the domestic telco shouldn't be available to the group. The only way for this cash to cross the firewall would be through the payment of dividends, which bodes well for public shareholders -- assuming SoftBank doesn't do something audacious like create preferred shares to hog all that cash for itself. 

What a listing would ultimately do is help Masa show the world that he does have a quality business under his banner, a crucial talking point in renegotiating the debt and making further investments. With SoftBank having exhausted Japanese banks' appetite, it's very likely he'll need to raise more cash overseas.

In the end, Masa isn't selling the goose that lays the golden egg. He's putting it on show for the world to see.

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

    To contact the author of this story:
    Tim Culpan in Taipei at tculpan1@bloomberg.net

    To contact the editor responsible for this story:
    Paul Sillitoe at psillitoe@bloomberg.net

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