This article first appeared in The Edge Malaysia Weekly on March 23, 2020 - March 29, 2020

IF you are searching for a high-profile global corporate victim of the coronavirus crisis, look no further than Japan’s SoftBank Group, the world’s largest tech investor, which has seen its shares plummet 54% during the period. The tech giant’s slide has accelerated since the ratings agency Standard and Poor’s cut its outlook to “negative” last week. On March 19, the stock plunged 17%. SoftBank shares are now down 73% from the February 2000 dot-com peak, when its founder, Masayoshi Son, was briefly the world’s richest man. Can SoftBank survive the crisis? Or will it be reduced to a shadow of its former self when it is over?

Dubbed the “Berkshire Hathaway of Tech”, after billionaire Warren Buffett’s value investing conglomerate, SoftBank has traditionally used the cash flow from its core Japanese telco operation to make oversized bets on technology start-ups that aim to disrupt traditional industries, just as Berkshire has leveraged cash from its insurance business to invest in Coca Cola, Apple and BNSF Railway as well as an array of banks and airlines. SoftBank’s focus has been mainly on a range of new technologies, including artificial intelligence, Internet of Things and robotics. Key investments include ride-hailing firms such as Uber Technologies, China’s Didi Chuxing, Southeast Asia’s Grab, India’s Ola, subscription-based software-as-a-service play Slack Technologies, microprocessor design firm ARM Holdings, co-working giant WeWork and Indian hospitality firm OYO Rooms.

“SoftBank has the strongest position in the world to invest in disruptive innovation,” says Pierre Ferragu, an analyst at New Street Research in New York. “With its scale and existing positions, SoftBank can build a unique portfolio of assets playing the most profound disruptions we see today.”

SoftBank’s biggest asset is its near 29% stake in Chinese e-commerce behemoth Alibaba Group Holdings. SoftBank famously invested US$20 million in Alibaba in 2000, a then-fledgling Chinese internet venture, which is now worth US$140 billion. Its second biggest asset is confusingly named SoftBank Corp KK, Japan’s No 2 telco. Until now, it has funded its forays in tech in part by pledging its shares as collateral.

Few companies have as much debt and are as exposed to a global economic downturn as the legendary tech giant, which has gross consolidated debt of nearly US$170 billion and net debt of over US$130 billion. That does not include US$8 billion in loans one of the world’s most indebted non-financial firms helped facilitate to employees of its Vision Fund to invest in the fund.

As the crisis pushes the global economy into a recession, SoftBank’s strategy of overpaying for start-ups while it continued to pile up leverage is beginning to come undone. Its recent credit rating downgrade came in the wake of a dramatic surge in the price of insuring against defaults. SoftBank’s credit-default swaps had spiked to the highest since the Tech Wreck 20 years ago.

“We believe SoftBank’s aggressiveness in pursuing growth and managing its finances makes its financial standing weak,” S&P said. The ratings agency argued SoftBank’s relentless pursuit of an aggressive debt-laden strategy “raises questions over its commitment to financial management”.

To be sure, the current crisis has hurt few global companies harder than SoftBank. Covid-19 has severely impacted travel, hospitality and even the workplace. As more people “work from home”, WeWork suffers, says Atul Goyal, an analyst for Jefferies & Co in Singapore. Moreover, as people commute less for work, Uber, Didi and Grab take a big revenue hit, he says. Restrictions on travel and lockdowns around the world impact firms like OYO. As the crisis drags on, companies in SoftBank’s stable, the Jefferies analyst argues, face incrementally more balance sheet pressures while their losses keep piling up.

New Street’s Ferragu sees three things that could dramatically change the outlook for SoftBank in the coming months: (i) a recession in Japan that impacts its telco subsidiary Softbank Corp KK’s dividend; (ii) a continued sell-off in global equities that affects SoftBank’s gross asset value; and (iii) a freeze in refinancing options for the group. “None of these dimensions are likely to affect SoftBank’s control over liquidity. There is no liquidity risk,” he says.

He does not understand what the kerfuffle over S&P’s credit rating downgrade is all about. Even in a worst-case scenario, if gross recourse debt represents 33% of SoftBank’s liquid asset value and net recourse debt 23%, the New Street analyst notes, SoftBank is unlikely to go under.

For his part, Son has long argued that the market was massively undervaluing SoftBank’s sum-of-parts, even under a doomsday scenario. In recent years, Son has on several occasions authorised share buybacks by either borrowing against the value of some of its assets or selling some some Alibaba shares. Despite several rounds of buybacks, SoftBank shares have steadily declined. Last month, activist investor Paul Singer’s hedge fund, Elliott Management Corp, built a US$2.5 billion stake in SoftBank as part of its campaign to improve the value of the Japanese conglomerate. Elliott pressed SoftBank for details of nearly US$10 billion of investment securities on its balance sheet. Items listed as investment securities on a balance sheet are often tradable financial assets, such as listed equities, but investors have long suspected those on SoftBank’s balance sheet are mostly overvalued unlisted securities. Elliott also wants SoftBank to buy back as much as US$20 billion of its own shares.

Aware that Singer is no pushover, Son moved quickly to announce ¥500 billion (US$4.5 billion) of share buybacks, or less than quarter of what Elliott was requesting. Son said last year that he is willing to do more buybacks but is constrained by SoftBank’s needs for its investment activities. 

With the arrival of Elliott, the legendary tech investor who often touts his “300-year vision” for SoftBank, has been moving at a brisk pace to assuage investors’ concerns over governance. Early this month, Son was in New York for a pre-initial public offering summit introducing investment banks and fund managers to some SoftBank companies that are ready to list, such as British FinTech firm OakNorth and data storage company Cohesity.

Last week, SoftBank backed away from part of its planned bailout of WeWork to buy US$3 billion worth of WeWork shares from existing shareholders, including nearly US$1 billion from its controversial co-founder Adam Neumann, who was forced out as CEO last September. SoftBank cited regulatory probes into the start-up’s business, including from the US Securities and Exchange Commission and Justice Department for pulling out of the deal. As part of a bailout package last October, SoftBank made a tender offer worth up to US$3 billion to all non-SoftBank shareholders at a price of US$19.19 per share — implying a US$8 billion valuation for WeWork. SoftBank also invested US$1.5 billion and agreed to lend up to US$5 billion to WeWork. It has not withdrawn those commitments.

The pandemic has struck at the very heart of WeWork’s business model. WeWork leases buildings for the long term, spruces them up and leases them out to smaller firms or individuals on shorter-term leases. As Covid-19 has taken hold, small companies and freelancers are eager to terminate their short-term leases.

SoftBank is now looking to raise an additional US$10 billion to help its first Vision Fund support portfolio companies such as WeWork, OYO and its ride-hailing affiliates like Grab, which have been hit by the pandemic. SoftBank is reportedly looking to raise US$5 billion from outside investors and has told potential investors that it will match that by injecting US$5 billion itself.

By beefing up its problematic US$100 billion Vision Fund, analysts say SoftBank is indicating that it has deferred the audacious US$108 billion Vision Fund 2. Son had conceded last month that the launch of Vision Fund 2 has been delayed due to investor concerns about the performance of the first Vision Fund. SoftBank had told analysts and investors that it was considering investing its own money in a bridge fund for two years to build a portfolio that will give investors enough confidence to participate in a second Vision Fund. Now as the Covid-19 crisis has dragged on, the Japanese tech giant is attempting to prop up its first fund.

The original Vision Fund showed total investment gains of US$9.5 billion last December. Since then, US and Japanese markets have lost 30% of their value and venture capital-backed privately held firms and start-ups have seen their valuations decline even further. The Covid-19 rout has wiped out most of those gains over the past six weeks. Uber, one of SoftBank’s key investments, has seen its stock decline 65% since its IPO, Slack shares are down 20%, cancer testing firm Guardant Health shares are down 26% over the past month. 

Many of Vision Fund’s private investments have fared even more poorly. The fund invested  US$1.5 billion in OYO for a 46% stake. The Indian hospitality firm was valued at about US$8.5 billion last year. In recent weeks budget hotel firm OYO, run by 26-year-old founder and CEO Ritesh Agarwal, has laid off thousands of employees in China and around the world. 

Other travel-related firms in  Vision Fund’s portfolio are reeling as well. Hong Kong-based Klook and Berlin-based GetYourGuide offer tickets to museums, bus tours and other travel experiences. Bookings have collapsed and the two firms reportedly need more money to tide them over the crisis. Yet, another privately held firm, satellite start-up OneWeb, which got  US$1 billion from SoftBank three years ago, is reportedly mulling a bankruptcy filing.

Even if the Vision Fund makes huge losses over the next several quarters, SoftBank’s own future is secure. Son would likely hunker down and pare assets to stay afloat. He has gone from boom to bust before. In 2000, SoftBank shares lost 95% of their value and Son struggled to avoid personal bankruptcy until he found his personal phoenix, Alibaba, which resurrected him. Ferragu expects SoftBank to make progress in implementing financial guidelines, improve governance and increase disclosure of Vision Fund to reassure shareholders.

“As the recession plays out, SoftBank will be more mindful of the uncertain environment and liquidity concerns and adopt a more cautious pace,” says the New Street analyst.

Assif Shameen is a technology writer based in North America
 

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