Softbank’s Son Saves $2 Billion Hedging Sprint Deal

Masayoshi Son became Japan’s second-richest man by knowing when to take a risk. He also knows how to avoid one.

The chairman of Softbank Corp. hedged the company’s $20 billion purchase of Sprint Nextel Corp. by fixing the cost of dollars needed for the acquisition at 82.2 yen each. The move will save him at least $2 billion as the yen has weakened about 15 percent since the deal was announced Oct. 15.

“The yen’s move was very fast, so Softbank’s hedge is outstanding,” said Kimihiko Tomita, head of foreign exchange in Tokyo at State Street Bank & Trust Co. “They moved rather quickly to get the dollar at that rate.”

Son has a history of financial ingenuity in record takeovers including the 2 trillion yen Vodafone K.K. deal financed by Japan’s largest asset-backed loan at the time, and the Sprint stake purchase, the country’s biggest overseas acquisition. Softbank’s potential savings on Sprint show yen depreciation attributed to Prime Minister Shinzo Abe’s vow of “unlimited easing” is having an effect beyond Japan’s automakers and struggling electronics exporters.

“We were expecting that the exchange rate may change,” Son said on a Jan. 31 conference call to discuss earnings. The entire $20 billion for Sprint is covered by yen forwards at 82.2 to the dollar, he said. He didn’t say when the forwards were purchased.

Hedging Cost

Softbank expects to book about 17 billion yen in costs for the hedge in the three months ending March, according to a statement from the company. Son has a net worth of about $8.9 billion, Japan’s highest after Fast Retailing Co. President Tadashi Yanai’s $13.3 billion, according to the Bloomberg Billionaires Index.

The chairman’s deals have also left Softbank as the country’s most indebted phone company and with a Moody’s Investors Service credit rating at the lowest investment grade. The weakening Japanese currency would help pay debt by causing Sprint’s dollar-based earnings to appreciate in yen terms.

Earnings before interest, taxes, depreciation and amortization at the Overland Park, Kansas-based wireless carrier will be about $5.4 billion dollars this year, according to the average of 22 analyst estimates compiled by Bloomberg. That’s worth about 498 billion yen at today’s exchange rate, about 73 billion yen more than on the day Softbank and Sprint announced the takeover.

Softbank rose 1.5 percent to 3,380 yen at 11:16 a.m. in Tokyo trading, bringing its advance this year to 7.6 percent.

Dollar Convertible

Son’s mobile carrier also bought a $3.1 billion dollar based convertible bond issued by Sprint that has gained in yen terms as the U.S. currency appreciated, said Hitoshi Hayakawa, an analyst at Credit Suisse Group AG. “The same logic works for Sprint’s EBITDA and projected earnings contributions.” He said the currency gains would not be significant enough to warrant a change in his outperform rating on the shares.

Softbank’s credit rating, under review for possible downgrade at Moody’s, will mostly depend on U.S. regulatory approval of the Sprint acquisition, said Peggy Furusaka, an analyst at Moody’s in Tokyo. “If U.S. regulators don’t approve the deal, Softbank’s debt won’t increase.”

The Federal Communications Commission will maintain its original schedule for reviewing Softbank’s offer for Sprint, dismissing a request for a delay from Dish Network Corp., the New York Post reported Feb. 9, citing people “close to the deal.” The Japanese carrier is also expected to overcome Justice Department concerns, the report said.

Yen Forecast

While regulators scrutinize Son’s Sprint offer, the Japanese currency has held near the lowest since 2010. Policy makers at the G-20 meeting in Moscow that ended on Feb. 16 signaled Japan has scope to keep stimulating its economy as long as policy makers cease publicly advocating a sliding exchange rate.

The currency will be at 93 per dollar this quarter and 95 by the end of the year, according to the median forecast of economists surveyed by Bloomberg News. At those rates, Son’s hedge still looks good, said Tomita of State Street.

“If Softbank can save 200 billion yen in cash, that is indeed very good luck.”

Before it's here, it's on the Bloomberg Terminal.