Two days ago, the Nikkei reported that the millennium's most iconic juggernaut of epic malinvestment, Japan's SoftBank - which may well be this bubble era's "short of the century" - was in talks to receive about 300 billion yen ($2.76 billion) in financing from Japan's leading banks, as the company scrambled to fund a turnaround at its co-working startup, the scandal plagued and terribly misnamed WeWork... which earlier today fired 20% of its workforce.
Why did Softbank need the money? Because as part of its bailout of arguably the most disastrous investment of this century, SoftBank had to fund a $3 billion tender offer to raise its stake in WeWork, and provide an additional $3.3 billion through loans and other methods.
At this point SoftBank ran into a problem: while the bank/telecom/venture capital arm of Japan's richest man, Masayoshi Son, had more than 2 trillion yen on hand, or about $19 billion, it was hoping to borrow additional funds so it can maintain a certain level of cash reserves. For banks - such as SoftBank's main lender, Mizuho Financial - this presented a rare moneymaking opportunity amid Japan's ultralow interest rates.
Here, Softbank ran into another, bigger problem: many of Japan's top banks had already lent large amounts of money to SoftBank and were cautious about taking on further risk. Adding insult to injury, these banks were also investors in the SoftBank Vision Fund which suffered a massive loss over WeWork's aborted initial public offering, not to mention the dismal investment in Uber, and were said to be nixing an investment in a second fund proposed by SoftBank.
And then there was the biggest problem: Mitsubishi UFJ, Japan’s biggest bank, was said to withhold additional loans to finance SoftBank’s $9.5 billion rescue package for WeWork, the FT reported overnight. While WeWork had gotten a tacit approval from the bank consortium consisting of Mizuho and Sumitomo Mitsui, the third member of SoftBank's lending group, MUFG said it would turn down the request, if the loans are to be used to save WeWork.
And just like that the radioactivity of Adam Neumann's former company turned gamma.
According to the FT, Sumitomo also did not want to lend to the WeWork bailout, but acknowledged that it had no real control over how SoftBank used any corporate loans once they had been extended (which is odd because clearly MUFJ had no such qualms).
According to analysts, the unprecedented cautious stance - in which SoftBank's closest circle of lenders effectively issued a vote of no confidence in Son's investment capabilities - could signal a turning point in the close relationship between Japanese banks and SoftBank’s deal-driven founder Masayoshi Son. It would also mean that what we predicted before, is now virtually assured - the next time SoftBank needs money, it will go to the BOJ directly.
When is the BOJ's bailout of Softbank?— zerohedge (@zerohedge) September 5, 2019
To be sure, such a snub of a core client is unheard of, especially in always polite Japan. However, after SoftBank's recent massive $6.4 billion quarterly loss, and since the "valuation issues" at WeWork which brought down the value of the office subletting company from $47 billion to essentially zero, there has been “a definite change in mood” among the Japanese banks and doubts have emerged over some parts of SoftBank’s investment strategy, said a banker close to SoftBank.
So what is SoftBank to do?
Well, as Bloomberg reported late on Thursday, SoftBank execs - finding themselves in a liquidity crunch - have been forced to admit they overpaid for WeWork again, this time when they bailed it out of bankruptcy, and are now looking for a way to reduce the size of a $3 billion offer for WeWork stock as part of its rescue package.
The discussions at SoftBank center around shrinking a $3 billion tender offer for WeWork shares owned by founders, employees and investors, according to people with knowledge of the talks. Such a move would be designed, first and foremost, to limit the amount paid to the company's megalomaniacal co-founder Adam Neumann, said Bloomberg's sources.
Yet while there would be a collective cheer if Neuman were to see his platinum parachute reduced to flaming plastic bag, it’s unclear how SoftBank could renege on its agreement with WeWork investors and most of all, with Neumann. Any effort to re-draw terms could result in an unprecedented, and even more humiliating, legal battle as SoftBank takes on the company that until recently was at the forefront of its historic investment spree and, no joke, "AI Revolution" as SoftBank calls its crazy rollup of dozens of startups.
As part of the deal, Neumann would sell almost a billion dollars, or $970 million worth of largely worthless WeWork stock to SoftBank. Some more details from Bloomberg:
In recent internal discussions at SoftBank, some executives have said the payout to Neumann is too generous, the people with knowledge of the talks said. It may be a case of buyer’s remorse after WeWork employees expressed outrage over the favorable deal given to Neumann while the business was in turmoil. Representatives for Neumann, SoftBank and WeWork declined to comment.
Neumann, who just days before the now infamously imploded WeWork IPO was treated as a god by the bank's underwriters including JPMorgan and Goldman, departed the company’s board as part of the rescue package and was replaced by SoftBank executive and newly appointed Chairman Marcelo Claure. Meanwhile, the size of Neumann’s payout, which also included millions in consulting fees, has incensed some WeWork employees, which dropped by 17% today after the latest mass layoff by the company.
To be sure, as Bloomberg notes, no decision has been made yet and SoftBank may choose to fulfill the $3 billion tender offer in its entirety without haircuts, however that may prevent the bank from getting the money it hopes to receive from its banks; indeed, as noted above, it now appears that Mitsubishi UFJ will only grant Masa Son the money if Adam Neumann ends up with nothing (at least metaphorically speaking).
Big the biggest joke of all here is that at a recent briefing in Tokyo, SoftBank's billionaire founder Masayoshi Son acknowledged that this month’s financial results were “a mess” and that overvaluing WeWork was a judgment error. Well, isn't it ironic that after he massively overvalued WeWork when it was solvent, he also overvalued the office rental company (which.is.not.a.tech.company) when it was about to file for bankruptcy.
Son said that he had consulted with lawyers to see if he could back out of a $1.5 billion warrant SoftBank had pledged to WeWork, but they said he couldn’t. Instead, Son decided to buy even more shares at a discounted price, lowering the average cost of SoftBank’s equity in the business.
Because somehow throwing good money after an idiotic investment is supposed to be... good? smart?
We don't know the answer, but one thing we are sure of is what we said earlier this week: "Japan is without doubt the dumbest money this bubble cycle."
Japan is without doubt the dumbest money this bubble cycle https://t.co/uCduPdM461— zerohedge (@zerohedge) November 18, 2019