With Sprint Deal, SoftBank's Chief Looks Beyond Japan
Masayoshi Son has outgrown Japan. His $7.9 billion fortune makes the SoftBank founder and president the country’s second-richest man, according the Bloomberg Billionaires Index. His upstart SoftBank Mobile won Japan’s first iPhone contract in 2008 and has become the nation’s fastest-growing telecom, announcing the purchase of smaller rival eAccess for $2.3 billion earlier this month. Son, 55, also chairs Yahoo! Japan, one of the country’s most powerful Internet portals and broadband providers. His influence even extends to baseball, where his Fukuoka SoftBank Hawks are defending the Japan Series championship this fall.
But Japan’s aging population and stagnant economy pose challenges for almost every business, even telecoms. In the past five years, while the world’s consumers swooned for the iPhone and Android smartphones, handset shipments in Japan fell by 27 percent. That helps explain Son’s Oct. 15 Tokyo press conference announcing a $20.1 billion agreement to buy 70 percent of Sprint Nextel, the No. 3 U.S. telecom operator. If the deal clears, it will be the biggest Japanese external acquisition since at least 2000, according to data compiled by Bloomberg. Either way, it shows that Son wants a bigger spotlight than slow-growth Japan can provide. “I’m a man, and I think every man wants to be No. 1,” he said, standing next to Sprint CEO Dan Hesse at the Tokyo press conference. Hesse is slated to continue in that role.
The Sprint deal isn’t the first overseas foray for Son, who invested in Silicon Valley startups, including Yahoo!, during the 1990s dot-com rush and whose early $20 million stake in Chinese e-commerce powerhouse Alibaba Group may now be worth about $11.2 billion. Yet the Sprint deal would be by far his largest foreign bet. Until now, he has mostly focused closer to home. In 2006 he took over Vodafone Japan, an also-ran with a weak network, and boasted that he would overtake market leader NTT DoCoMo within a decade; the Sprint deal would put him on track. He undercut rivals’ phone-plan prices and invested in SoftBank’s LTE network infrastructure, experience that could benefit Sprint. He also persuaded Steve Jobs to make SoftBank, for a time, Apple’s exclusive Japanese iPhone carrier. After the completion of the eAccess deal, SoftBank will be No. 2 in the market with 39.5 million subscribers, Son said on Oct. 15.
Son, born in Japan to Korean parents, has long been a bit of an outsider among the nation’s corporate elite. “He’s regarded as a can-do type—Japan’s Richard Branson,” says Ben Collett, head of Japanese equities at Louis Capital Markets in Hong Kong. “He has demonstrated, in a shrinking economy, you can find growth opportunities by leveraging up massively.” While many Japanese companies scarred by the 1980s bubble economy are reluctant to take on debt, the Sprint deal could increase SoftBank’s net debt to 3.1 trillion yen ($40 billion), according to Daiwa Securities.
Sprint marks SoftBank’s first big push into the U.S., with $8 billion earmarked for new capital and $12.1 billion for Sprint shareholders. Son plans to pay for this with SoftBank’s $9.5 billion in cash and a bridge loan. “When he is committed and convinced of something, he is willing to bet everything he has,” says Gary Rieschel, managing partner of Shanghai-based Qiming Venture Partners and a former SoftBank board member. “He has that belief in himself.”
Other Japanese companies are looking abroad. So far this year, they’ve announced $96 billion in foreign takeovers, exceeding last year’s record of $88 billion. Given the strong yen, low valuations, and sluggish economy, “there is an overwhelming incentive for Japanese companies to go abroad,” says Frédéric Neumann, managing director and co-head of Asian economic research at HSBC Holdings. In the 10 biggest overseas purchases by Japanese companies from 2000 through last year, though, $330 billion of net market value was lost within 12 months of the deal announcements.
Fixing the money-losing Sprint will be a challenge for SoftBank. While a turnaround veteran at home, Son has never tried to rehab such a large foreign company. Although SoftBank Mobile has a healthy operating margin of 25 percent, Sprint is operating at a 6 percent loss. As telecoms shift from 3G networks to the faster LTE, Sprint’s relatively weak network stands in the shadow of market leaders Verizon and AT&T. The deal is enough of a gamble that it has spooked ratings agencies. Moody’s on Oct. 15 said it may cut SoftBank’s credit rating—by one level—to junk.
Still, there’s reason to believe Son can pull this off. Sprint should give SoftBank economies of scale over Japanese rivals for high-end smartphones and base stations, Credit Suisse analyst Hitoshi Hayakawa wrote in an Oct. 15 report, and Sprint stands to make similar gains in the U.S. “The new Sprint will now have more leverage with suppliers,” according to Bloomberg Industries analyst John Butler. “Telecom is a scale business, favoring the largest carriers.”
Says Neil Juggins, co-head of Pan Asian sector research at Ji Asia in Hong Kong: “He’s essentially saying, ‘Trust me on this.’ ” There will be some pain for SoftBank shareholders in the next few years, Juggins says, but looking out three years, he’s a believer in Son. “I wouldn’t bet against him making the numbers better,” Juggins says. “He knows how to do this.”