SoftBank's $100 bln VC dream requires creativity
26/10/2016 04:04
(The author is a Reuters Breakingviews columnist. The opinions
expressed are her own.)
By Robyn Mak
HONG KONG, Oct 26 (Reuters Breakingviews) - Masayoshi Son is
nothing if not ambitious. The SoftBank chief executive has
pledged to commit $25 billion over five years to a new
technology fund which will have up to $100 billion to play with
altogether. That's a big sum for a company with a strained
balance sheet. But Son still has ways to find cash at his tech
group.
Less than three months after its $32 billion purchase of
chipmaker ARM, SoftBank is working on the new investment vehicle
with Saudi Arabia. The kingdom's top sovereign wealth fund could
chip in $45 billion, with SoftBank and other big investors
making up the rest. Son said the fund will target "one or two"
multi-billion-dollar acquisitions, the Financial Times reported
on Tuesday.
Even for the $75 billion SoftBank, chipping in a quarter of
the fund's eye-catching total looks a stretch. The Japanese
group expects its domestic telecom business to bring in 500
billion yen ($4.8 billion) in free cash flow for the year ending
in March. But its loss-making U.S. subsidiary, Sprint S.N , is
still burning through cash. The mean of analysts' estimates for
SoftBank's free cash flow in 2017 is only a little over $3
billion.
Son also pays out roughly $500 million in dividends
annually. Barring an unlikely quick turnaround at Sprint, that
means he'll fall well short of having $5 billion a year to spare
for the new fund, assuming his pledge is spread evenly over five
years.
Taking on more debt could be tricky. After buying ARM, the
group's consolidated net debt stands at 7.1 trillion yen, a
chunky 4.4 times EBITDA. Then again, SoftBank in August floated
the idea of selling $10 billion of hybrid bonds - debt-like
securities that are treated more like equity. That could become
one new source of funds.
Another could be the fees from running the fund on behalf of
others. A 2 percent annual management fee on the other
investors' cash - perhaps a generous assumption - would bring in
an additional $1.5 billion a year for SoftBank. And Son could
also offload more assets, like the sale of part of SoftBank's
Alibaba BABA.N stake and gaming companies Supercell and GungHo
3765.T , which together raised about $17 billion.
Investors hoping for a disciplined focus on debt reduction
at SoftBank are likely to be disappointed. Son still has a few
creative options up his sleeve.
On Twitter https://twitter.com/mak_robyn
CONTEXT NEWS
- SoftBank's planned $100 billion technology investment fund
will make one or two big acquisitions that match the company's
purchases of Sprint and ARM Holdings, the Financial Times
reported on Oct. 25, citing comments made by Chief Executive
Masayoshi Son.
- The fund will also make "several $2 billion to $5 billion
company acquisitions and then a bunch worth $1 billion", the
newspaper reported Son saying.
- SoftBank announced the vehicle, tentatively named the
"SoftBank Vision Fund", on Oct. 14 in partnership with the
Public Investment Fund, Saudi Arabia's top sovereign wealth
fund.
- SoftBank plans to invest at least $25 billion over five
years, while PIF will potentially provide up to $45 billion over
five years as the "lead investment partner". Other large global
investors are also in talks about participating, SoftBank said.
- For previous columns by the author, Reuters customers can
click on MAK/
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FT: SoftBank plans multibillion-dollar buys with $100bn tech
fund https://www.ft.com/content/d86f1e90-9ad1-11e6-8f9b-70e3cabccfae
SoftBank announcement http://www.softbank.jp/en/corp/news/press/sb/2016/20161014_02/
BREAKINGVIEWS: SoftBank and Saudi pump fresh air into tech
bubble urn:newsml:reuters.com:*:nL4N1CK1IW
BREAKINGVIEWS: SoftBank takes maverick option on financing
urn:newsml:reuters.com:*:nL3N1AL19F
BREAKINGVIEWS: SoftBank's Son tests limits of investor patience
urn:newsml:reuters.com:*:nL4N1A51I0
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(Editing by Richard Beales and Kathy Gao)
((robyn.mak@thomsonreuters.com;)(Reuters Messaging:
robyn.mak.thomsonreuters.com@reuters.net))
Keywords: SAUDI JAPAN/FUNDS BREAKINGVIEWS