Softbank

As a longtime follower of Softbank, I’ve always enjoyed what new challenges and dreams Masayoshi Son would lay out. And though I appreciate guidance, I was a bit taken back by his 300 year plan in 2010. Despite some earlier stumbles with Ziff-Davis and Kingston Technologies, Softbank finally succeeded with the listing of Yahoo Japan in 1996. When Softbank bought Japan Telecom in 2004, many didn’t know what to believe, thinking that it was quite a departure from their core strengths. One of their competitors lamented, “We don’t know how to respond, [They] are used to fighting guerilla wars and we don’t know how to fight a guerilla war”.

Several years later, I ran into one of the former executives at Japan Telecom who oozed with admiration saying, “What they did with Japan Telecom was nothing short of miraculous”. Given this record of success and increasing forecasts for the value of Alibaba, from $25bn in 2009 to $300bn shortly after the 2014 listing, one can appreciate why Mr. Son enjoyed a certain ‘confidence’. Then Softbank purchased Sprint in the summer of 2013, just after Sprint had bought Nextel with the massive bandwidth that it owned. I must say though, that I was perplexed and it wasn’t until the following year when Softbank made a bid for T-Mobile when it all made sense. It would have been the perfect strategy, had not the misguided US federal antitrust officials nixed the deal, questioning the anti-competitive aspects of the deal. Such convoluted logic, that two weak players and two dominant players, make for a more competitive playing field; would probably have Joan Robinson, with her ‘monopolistic competition theory’, rolling in her grave.

 In late 2014, Softbank was raising money to pad down its war chest and some brokers called me, asking whether I was interested. I remembered how Softbank had had to offer the syndicate of 15 or more banks its cash flow from the 2004 Japan Telecom purchase as collateral and over 4% interest to close the ¥1.7trn loan. So when the broker said that the subordinated 7-yr bonds paid only 2.5%, I decided to pass. In the last year, Softbank’s interest bearing debt has reached ¥11.6trn and net debt ¥8.3trn (including ¥3.1trn in bonds). Markets have increasingly priced Softbank against its core assets (Ch1). As the share price of its assets have fallen, fears that Softbank  getting out of its US quagmire would take more than [a] Sprint, have weighed heavily on the shares. The price of insuring Softbank’s debt has also risen to 383bps, but surprisingly, the recent bonds have held up much better than the equity. (Ch2) Like the former JT executive, however, my admiration for Mr. Son’s chuzpah is unshaken.

Chart 1: Softbank and its Holdings

The yellow line represents the combined market capitalisation of Softbank's holdings in Alibaba, Sprint, Yahoo Japan and Gung Ho

Chart 2: Softbank Shareprice, Volatility, CDS and Bond Prices

Note: Chart shows Softbank's share price (inverted) against stock volatility and CDS. Softbank's 53/8 bond traded at 98.741 as of 2/10/16 while Softbank 21/2 traded at 100.446


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