SoftBank Group slashed its stake in Alibaba Group Holding last week as it targeted ways to raise cash, following a massive ¥3.1627trn (US$23bn) loss in the past quarter.
Founder Masayoshi Son, the man sometimes dubbed "Mr 10 Times", told reporters on Monday that he had invested in too many companies and paid too much for them, conceding valuations had formed a bubble.
The loss, Son said, was largely due to the global stock market turmoil and rapid fall in the yen. The former resulted in ¥2.33trn of losses in Vision Funds, while the latter led to a ¥820bn loss on foreign currency debts.
"With the loss likely to expand further, defending its balance sheet is the priority," said Citigroup analyst Mitsunobu Tsuruo. He said the loss in the past quarter was much larger than expected.
The Japanese investment conglomerate is in monetisation mode indeed, as Son flagged six months ago.
On Wednesday, it said it would settle early a derivative transaction based on shares it holds in Alibaba to give it a ¥4.6trn accounting gain before tax. The contracts are a type of derivative that allows SoftBank to raise cash immediately while retaining the possibility of holding on to the shares.
SoftBank had two options to settle the contract in cash or by delivering shares, and has opted to hand over up to 242m ADRs, representing up to 1.936 billion shares and worth over US$22bn. It said this would "eliminate concerns about future cash outflows", reduce costs associated with the contracts and help it weather the current tough market environment. This will cut its shareholding in Alibaba to 14.6% from 23.7%.
The financial institutions involved had already hedged their transactions, so SoftBank's decision will not require the shares to be offered in the market. SoftBank did not disclose the full terms of the contract.
SoftBank will record a gain of ¥2.4trn on the revaluation of its Alibaba shares, as well as ¥1.5trn from settling the derivative transaction early, and a ¥0.7trn derivative gain.
Settlement is expected to be completed by the end of September. SoftBank will lose its seat on Alibaba's board, and will no longer be required to vote its shares in line with Alibaba executives, as it had been under a previous agreement.
According to SoftBank's earnings report, for the April-June quarter, US$10.5bn was raised through pre-paid forward contracts using Alibaba shares. In the January to March quarter, it raised US$13.2bn from such contracts.
Asked on Monday whether SoftBank was planning to raise more cash through the Alibaba-related derivatives, Son said the company was discussing various options and would disclose once decided.
The sale of Alibaba shares was as expected and "will likely continue", wrote SMBC Nikko analyst Satoru Kikuchi in a report on Wednesday. He thinks the sale was to avoid big losses for a second fiscal year which may violate loan or bond covenants.
SoftBank also raised US$2.4bn from the sale of T-Mobile shares to Deutsche Telekom. Vision Fund 2 also sold all its shares in KE Holdings, which SoftBank took public in 2020, for US$570m.
Son stopped short of talking much about the IPO plan for chip unit Arm as he wanted to use the press conference to "repent" the loss. Son said he had to speak in "low key terms" about the IPO, but he did say, however, "Things are going well" for Arm's listing, pointing to the unit’s US$719m in revenue during the period, up from US$675m in the same period last year.
Arm is preparing for a Nasdaq IPO late this year or early next year, but the British government has been lobbying for a UK listing of the firm. SoftBank this year agreed a US$10bn margin loan backed by shares in Arm.
Son also said SoftBank "may want to consider" selling Fortress Investment Group, the US-based alternative asset manager it bought for US$3bn in 2017 (a sale has been long-rumoured), and that it is ready to have talks with potential buyers.
SoftBank could go private in the future, after it exits from Arm and Fortress and continues reducing its stake in Alibaba, wrote SMBC Nikko's Kikuchi. "There will be little reason to be listed," he wrote.
Defensive approach
SoftBank also announced it will buy up to ¥400bn of its own shares within one year and that it will reduce headcount globally.
The new stock repurchase plan came on top of the ongoing ¥1trn plan from November 2021 to November 2022, under which SoftBank had already bought ¥700bn as of July.
According to Citi's Tsuruo, SoftBank told investors on Wednesday the total stock repurchase will be up to ¥1.4trn but could end up totalling just ¥1.1trn. "Compared with the ¥1trn it announced it would purchase in one year, the pace [of additional purchase for the next 12 months] will be halved," Tsuruo said, describing the move as SoftBank shifting focus to defending its balance sheet rather than supporting its stock price.
As the company has been in defensive mode, it was able to lower its loan-to-value ratio to 14.5% from 20.4% at the end of March, the only positive Son said he could highlight for the past quarter.
Keeping LTV below 25% is one of two self-imposed financial rules. The other is to have sufficient cash to repay debt for the next two years. As of end-June, SoftBank holds ¥4.6trn, more than the ¥1.8trn needed.
The group's net asset value dropped US$16bn to US$135bn in the quarter, but the weaker yen helped NAV stay unchanged at ¥18.5trn in yen terms compared to the previous quarter. Still, Son revealed that the latest yen-denominated NAV is ¥17.5trn, down by ¥1trn since end-June.
Son said he did not know when the "winter" for tech valuations would be over but many, including himself, believed now was the time to buy.
"I don't know whether it will be three months or three years. When will peace come back to Ukraine? We don't know. We have to be concerned about tension between China and Taiwan, and Covid-19 is not completely gone,” he said, also noting the risks to stocks from high inflation and rate hikes.
"We would say we are in winter (but) many people think (this) is the time to buy, including myself."
SoftBank's five-year credit default swap only widened a bit to 449.6bp on Tuesday from 447.8bp on August 5, according to Refinitiv data. Its share price dropped 7% to ¥5,295 on Tuesday after the earnings report, underperforming the Nikkei which was down 0.88%, but bounced to ¥5,610 on Friday following the Alibaba transaction announcement.
(Additional reporting by Fiona Lau)