This bank is involved in several M&A transactions, and its stock appears to be heavily discounted.
SoftBank Group Corp. (SFTBY)
From Internet Wealth Builder
Masayoshi Son is the Korean-Japanese, University of California, Berkeley-educated founder of one of Japan’s most successful companies, SoftBank Group (SFTBY).
Son is a tremendous capital allocator with a highly impressive record: Over the past nine and a half years, SoftBank’s investments have delivered a 45% annualized rate of return. A big chunk of this success can be attributed to one stock: Chinese e-commerce giant Alibaba, a $100 million investment SoftBank made in 2001 that is worth about $80 billion today.
Though you may put Alibaba in the (positive) black swan column, Son’s success as an investor goes well beyond it—the list of his investments that have brought multi-bagger returns is long. The 57-year-old Son is Japan’s richest person, and SoftBank, which he started in 1981 and owns 19% of, has a market capitalization of $72 billion.
You’d think SoftBank would be priced to reflect Son’s premium. Instead, its stock currently trades at around a 50% discount to the fair value of its known assets (SoftBank has about 1,300 investments, many of them not consolidated on its financial statements).
The gap between what SoftBank is worth (its fair value) and its stock price has widened substantially over the last few years despite the stock’s appreciation. Our fair-value estimate of SoftBank shares is about $80.
Frustrated with SoftBank’s valuation, Son has begun to make strategic moves to deleverage SoftBank. Earlier this year, in February, SoftBank announced it might take its Japanese telecom business public. SoftBank is expected to sell about 30% of its stake and should raise about $20 billion.
SoftBank also owns a large chuck of Didi, the largest Chinese ride-hailing company. It’s a Chinese version of Uber, which in fact bought Uber’s assets in China. Didi is a privately held company. Recently SoftBank announced that it is going to sell its shares of Didi to Vision Fund for $20 billion.
Vision Fund is a $100-billion private equity-like investment vehicle created by Son. SoftBank owns one-third of Vision fund and has an even larger economic interest in it.
And then there is Sprint. SoftBank owns 82% of its publicly-listed shares. After dating T-Mobile for almost a year, Sprint and T-Mobile finally decided to merge. There is a chance that the government might not approve this merger, but we think the probability of approval is high. The telecom industry requires scale: the cost of a network (cell towers, equipment, and spectrum) is mostly fixed, and profitability of a carrier is for the most part determined by the number of users. T-Mobile and Sprint are each half the size of giant incumbents Verizon Communications and AT&T, which achieved their size through dozens of acquisitions.
The combination of Sprint and T-Mobile would reduce competition in the short run, but in the long run it would create a strong and viable competitor and thus stable prices for consumers. T-Mobile and (especially) Sprint on their own would eventually get marginalized into irrelevance by AT&T and Verizon by the large cost of 5G rollout.
If the merger goes through it would improve the optics of SoftBank’s balance sheet. SoftBank owns 82% of Sprint and thus has to consolidate Sprint’s $30 billion of debt on its balance sheet. Despite SoftBank’s control of Sprint, in the event of bankruptcy SoftBank is not liable for Sprint’s debt. After the merger SoftBank will own around 27% of the combined entity and thus, magically, the debt of the new company will migrate from SoftBank’s balance sheet to the balance sheet of Deutsche Telecom, the majority owner of T-Mobile.
Between the sale of Didi, the Japanese telecom IPO, and the Sprint/T-Mobile merger, SoftBank should see its debt drop by about $70 billion. The current discount between the fair value of SoftBank’s assets and its stock price is caused by the perception of enormous leverage, and as the leverage gets cured so will the perception.
There are many ways to look at SoftBank. You can think of it as buying a stock at a roughly 50% discount to the market value of its assets or as a way to buy Alibaba at less than half its current price. Alibaba is a great play on the Chinese consumer who is spending more and more money shopping online. It is synonymous with Chinese online shopping, whose growth may accelerate with higher smartphone penetration and, just as important, the ongoing rollout of a fast wireless LTE network.
You can also look at SoftBank as a vehicle through which to invest in emerging markets — not just China but India as well. It is almost like hiring the combination of Warren Buffett, Richard Branson, and Steve Jobs to go to work for you investing in markets whose economies in a few decades will surpass that of the U.S., while also investing in a segment — the Internet — that is growing at a much faster rate than the overall economy.
And, of course, you have Masayoshi Son, the Buffett-Branson-Jobs fusion, making these investments for you. With SoftBank at this valuation, you can ditch your emerging-markets mutual fund.
I don’t expect every bet Mr. Son makes in Vision Fund to work out. Not at all. I look at Vision Fund as a portfolio of bets. For instance, his investment in WeWork and WeWork’s valuation make me cringe. I am also concerned that he feels the need to spend $100 billion all at once. There will be a time when this money will buy a lot more than it does today. I feel uneasy that the $100 billion will be like a pig going through the python of Silicon Valley, inflating the prices of technology companies.
But a few things let me sleep well owning SoftBank. First, Mr. Son owns 20% of the company - of every dollar SoftBank spends, 20 cents are his. In short, Mr. Son has skin in the game. Second, the discount of SoftBank stock to the fair value of its assets is so huge that it could absorb the blow-up of Vision Fund. And finally, I remind myself that I’d probably have had a similar feeling of uneasiness about Mr. Son’s decisions at any time in his 30-plus-year career (PCs in the ‘80s, Internet in the ‘90s, telecom Japan, and Internet in China in the ‘00s).
SoftBank shares trade over-the-counter in the U.S. under the symbol SFTBY.
Gordon Pape, Internet Wealth Builder, www.buildingwealth.ca, 1-888-287-8229, July 15, 2018