SoftBank’s record $23 billion loss could prompt Masayoshi Son to reconsider privatizing the group

SoftBank’s record $23.4 billion quarterly loss, a promise of deep cost cuts and an hour of public self-criticism from its founder Masayoshi Son could cause the Japanese billionaire to reconsider a management buyout of the tech conglomerate.

Analysts and investors said the latest results, which provided new signs that SoftBank was preparing to sell key operations such as Fortress Investment Group and focus more exclusively on its two Vision funds, raised questions about if it was still necessary to be quoted.

People close to the company confirmed that Son had discussed the option of taking SoftBank private several times over the past three years, but had always rejected the idea, in part due to pressure from the biggest bank lenders. Japanese company, especially Mizuho.

The reignited debate over SoftBank’s future as a public company follows Monday’s announcement of a second consecutive quarter of record losses, mainly due to the underperformance of its flagship product Vision Funds as technology valuations world collapsed.

SoftBank’s unprecedented red inkjet in the April-June quarter sent the company’s shares down 8% in Tuesday’s trading as investors wondered if, without a rebound in tech stocks markets, SoftBank could later be forced into further valuation writedowns on the unlisted portion of its Vision Fund portfolios.

In a note to investors published Monday evening, SMBC Nikko analyst Satoru Kikuchi argued that once British chip designer Arm’s initial public listing is completed, SoftBank would be a pure investment company and vehicle for Fund raising.

“He’s raising these funds with debt, so there’s no reason to be listed on the stock exchange,” said Kikuchi, who along with other analysts identified a distinct shift in strategy from Son as the Management now seemed to prioritize balance sheet defense over the kind of swashbuckling risk appetite SoftBank had made a name for itself on.

“We believe that changes in the very form of the business, for example an MBO, could occur in the not too distant future,” Kikuchi said.

SoftBank declined to say whether delisting was an option for the company.

Mitsushige Akino, chief investment officer at Ichiyoshi Asset Management, who had already sold the fund’s investment in SoftBank before Monday’s figures, said MBO talks were a possibility and that ultimately Son might opt ​​to re-list. SoftBank in the United States to obtain a higher valuation for the company.

Meanwhile, Akino said, the big question left by Monday’s numbers was whether Son, as an investor, was a true expert and professional. “Maybe he’s just a wealthy hobbyist. . . Son’s not a superstar. Looking at cause and effect, he’s now in a tough spot because he bought stock at a high price,” Akino said.

During SoftBank’s press conference, Son took a very pessimistic tone and repeatedly referred to the need for “self-reflection.”

“MBO talks around SoftBank could pick up speed from now on, but that may seem like the least worst option. When you look closer, an MBO is an increasingly difficult business to do because the company is highly leveraged,” said longtime independent SoftBank analyst Pelham Smithers.

Son also warned that the “winter” for unlisted stocks in the portfolio could be longer than for their listed counterparts, adding to investor concerns about further valuation writedowns. In its income statement, SoftBank reported unrealized losses of $2.3 billion for unlisted shares of Vision Fund I (SVF1) and $6.6 billion for those of Vision Fund II (SVF2).

His comments come just a week after it was announced that the flagship portfolio of Tiger Global – the high profile hedge fund that has made a name for its heavy exposure to US and Chinese tech investments – had completed the first half of the year. year down 50% after expenses.

Chart showing SoftBank's net income/loss and its gains and losses on investments at Vision Funds

David Gibson, an analyst at MST Financial Services, said the unlisted portions of SoftBank’s holdings could take another 12-18 months to reset, although he noted that more than 80% of SVF companies now have enough liquidity to maintain them for two years. Gibson cited the example of Klarna, the Swedish fintech group, which in July raised $800 million at a $7 billion valuation, about one-seventh of the $46 billion valuation it commanded when SoftBank bought the company in June 2021.

“Stocks will struggle to perform in tough capital markets. The stock is a leveraged game in the availability of capital and higher technology valuations over the longer term,” Gibson said.

Others said the performance continued to cast a negative light on SoftBank’s judgment as an investor.

Kirk Boodry, a Redex Research analyst writing on the Smartkarma platform, said SoftBank’s investment losses over the past two quarters have left the two Vision Funds roughly where they were two years ago. years before the tech rally and the hangover that followed.

“One of the key takeaways is that the accelerated investment pace set by Vision Fund 2 has delivered a negative 20% return in two to three years. The “positive” twist is that it reflects a weak market for the technology, but it also raises questions (again) about due diligence and/or whether competition between SoftBank and other private equity firms has driven everyone to pay more than the odds,” Boodry said.

SoftBank’s record $23 billion loss could prompt Masayoshi Son to reconsider privatizing the group

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