SoftBank fire sale could include T-Mobile US stake

Japanese conglomerate SoftBank had a nightmare quarter thanks to massive losses at its Vision Fund investment arm and it might need to raise a few yen quickly.

Most of SoftBank group is doing fine. Its Japanese operations, its stake in Alibaba and ARM have no worries, and it finally managed to complete the merger of its Sprint MNO with T-Mobile US. But boss Masayoshi Son just couldn’t resist getting funny ideas about investing in all kinds of other unrelated stuff and it turns out a lot of those bets were bad ones.

As warned a month ago, WeWork is the major bust in the portfolio, but the whole thing has taken a severe kicking thanks to the business world grinding to a halt coz of coronavirus. The quarterly presentation seemed to essentially amount to an extended apology to shareholders for losing so much of their cash on reckless punts, followed by a plea for them to stay the course to give his unicorns (very large private companies) a chance to fly over the Valley of Coronavirus, to the fertile pastures beyond.

Even if Son’s pleas are well received, SoftBank may well join many other companies in having to manage a cashflow crisis until things start to pick up again. For that reason it seems possible that it will flog some of its stake in new, improved TMUS to Deutsche Telekom in order to bolster its working capital. A WSJ report speculated that such a move would give DT the majority share in the company and relegate SoftBank to relatively silent partner. On current form, that might not be such a bad thing for all concerned.

Softbank warns of $17bn blow to Vision Fund investments

COVID-19 is causing waves across the world, and now Japanese telco Softbank has warned the pandemic might well be the cause of ¥1.8 trillion ($17 billion) loss in the investment unit.

With the earning results for full year 2019 due on May 11, Softbank has released a statement to warn investors of some very dampened fortunes. Due to the impact of COVID-19, Softbank is forecasting an operating loss of roughly $12.5 billion, mostly due to the $17 billion blow dealt to the Vision Fund.

To make matters worse, Softbank is also warning of an additional ¥800 million (roughly $7.4 billion) loss to investments which are being held outside the Vision Fund, including WeWork and OneWeb.

Although it is hardly unusual for a company to make adjustments to financial forecasts due to current trading conditions, Twitter and Microsoft are two others who have made similar statements to investors, the impact might be compounded thanks to Softbank’s diversity and some questionable bets.

In 2018, Softbank founder and CEO Masayoshi Son attempted to add diversity to the business through the creation of an investment vehicle, the Vision Fund, though this is where the firm is exposed today. With the Dow Jones and FTSE 100 down 20% and 21% respectively since the beginning of the COVID-19 outbreak in the US and Europe, being an investor in the technology space is a tricky vocation today.

Some of Softbank’s investments are looking pretty positive, Slack for instance, but others are being hit hard by the outbreak. Cash which has been pumped into the real estate industry is not necessarily looking healthy, neither are bets into transportation and logistics. Uber, one of the companies in the portfolio, has seen share price decline by more than 30%.

Outside the impact of COVID-19, there are also other investments which are going sideways. WeWork has proven to be a flop, with the coronavirus covering up much deeper failings, while OneWeb recently filed for Chapter 11 Bankruptcy.

What is worth noting is that not all of the investments made by the Softbank Vision Fund are bad. Investors in such businesses usually have to accept the risk that not every gamble pays off, and while the coronavirus is negatively impacting the investments, it does not mean it will always be a loss maker. Over the last two years, investors have been enjoying the profits of Masayoshi Son’s VC ambitions, and we suspect it will be the same once COVID-19 stops wreaking havoc with society.

The question is what will happen in the interim period? Will investors understand this is only short-term pain, or will there be calls for actions to return to the traditional ways of telcos making money?

Ain’t no party like a Softbank party

Not even the end of its relationship with Deutsche Telekom could dampen spirits at the Softbank party, as the team reported $3.46 billion in profit, up 21% year-on-year, for the last quarter.

It’s domestic telecom business was down slightly for the first half of this year, Sprint was actually up compared to the same six month period of 2016, the Yahoo assets were also up, there aren’t any year-on-year stats for ARM just yet and the Softbank Vision Fund also brought in a healthy amount of cash. Aside from a messy break up with Deutsche Telekom, you could say it has been a very satisfactory six months for Softbank.

Talking about the potential Sprint/T-Mobile US merger, lets address the elephant in the room before it starts to get uncomfortable. It’s officially over and there is no going back now.

Softbank and Deutsche Telekom could agree on a number of things, and it is now officially over. Whether it was a disagreement over the controlling voice in the boardroom, or a valuation of the business or maybe there was fear of regulatory resistance to the deal, its off. The rumours were there last week, as were whispers of Softbank dilly-dallying with Charter, but some might have assumed these were mind games by Softbank CEO Masayoshi Son in an effort to gain some sort of advantage in negotiations, but alas no.

What this means for the Sprint business moving forward we’re not too sure. Quite frankly, Sprint needed this deal more than T-Mobile US did. T-Mobile US is a business going stronger every day with a solid network, a good relationship with customers and an agile marketing team, while Sprint is losing market share consistently. Softbank has announced it will increase its stake in the US telco from 83% to 85%, though there needs to be a serious shake up at Sprint if it going to reverse fortunes.

In terms of the financials, Sprint actually had a positive six months if you take it at face value. Sales were up for the six month period, though this is primarily down to a solid first quarter. The company hasn’t had a profitable year in more than a decade, and fortunes are not particularly appealing. Son has a knack of making money so we wouldn’t rule a turnaround out completely, but it will be tough going against the top three who are all heading in the right direction.

And while the consolidation ambitions of the business are not exactly teeming with success for the moment, another difficult issue is starting to appear on the horizon; debt. Roughly half of Sprint’s $38 billion in debt is coming due over the next four years. While a Softbank influenced Sprint might have slowed the mass exodus of customers, investments in the network are badly needed. Add the debt onto network investments, and Softbank might find itself forking out quite a bit of cash to turn this business around.

Looking at other areas, Softbank’s domestic Japanese telco business took a big of pinch on sales, though subscriber numbers are on the increase, for both mobile and broadband, and the churn rate is also heading in the right direction. Discounts for the mobile business have been on the increase over the last six months, which has led to a decrease in both telecom and service ARPUs, explaining the slight difference in revenues.

On a positive note, things seem to be going well at ARM, though comparable statistics from 12 months ago are not available. Next quarter will give a better idea of how the Japanese influence has been received by the chip-maker. Another bright spot is the Softbank Vision Fund, which made gains of roughly $1.7 billion on its investments over the first six months of the year. Makes up for the messy break up we suppose.