SoftBank's 'Conglomerate Discount' Balloons To $130 Billion As Investors Bet Worst Is Yet To Come

After a suite of marquee investments blew up in the company's face over the summer, SoftBank, the Japanese telecoms giant with a massive VC arm attached, is preparing to face its first real 'day of reckoning' this week when it reports Q2 earnings, according to the FT and Nikkei Asian Review. The results will be released after the close of Japanese markets on Wednesday.

Masayoshi Son

Most analysts expect a grim showing: In the span of a few months, SoftBank Chairman Masayoshi Son's reputation as one of the world's most successful momentum investors has been totally eviscerated. The company's stake in ride-share darling Uber has generated an on-paper loss of 30%. What's worse, Son has insisted on throwing even more money at WeWork parent 'The We Company' in a desperate attempt to stave off an imminent bankruptcy, which would have stuck SB with losses in the billions of dollars.

In the latest indication of just how little faith investors' have in the company, Nikkei points out that SoftBank's 'valuation discount', the gap between its valuation in public markets and its net asset value, has swollen to $130 billion.

Take the group's net debt figure of $45 billion (which excludes 10 trillion yen of debt held in subsidiaries and is the figure that Son prefers to use), add that to SoftBank's market capitalization of $81 billion, and its enterprise value is $126 billion. This is essentially the all-in cost of buying the company.

Against that, however, SoftBank has around $191 billion of quoted assets on its balance sheet, the largest of which is a 26% stake in Alibaba Group Holding, the Chinese e-commerce giant. It also owns U.K. chip designer Arm, which SoftBank has on its books at $25 billion, and another $8 billion of assorted assets it classifies as "others." Add it all up, and SoftBank owns around $224 billion of assets.

In addition, however, there are over 80 tech companies in the Vision Fund - such as ride-hailing giants Didi Chuxing and Grab, Indian hotel startup Oyo, and Chinese social media company ByteDance. SoftBank estimates its one-third share of these are worth $32 billion.

Add all these assets together and the total comes to $256 billion - or $130 billion more than the company is worth on the market. This is the "conglomerate discount," and it appears to have widened since Son railed about it in the past.

SoftBank and Son are still desperately trying to court Saudi Arabia and convince Crown Prince MbS to commit to backing a planned second iteration of its Vision Fund (which Saudi Arabia backed to the tune of $45 billion from its sovereign wealth fund). However, even before WeWork's valuation imploded, leading to the scrapping of its planned IPO and an embarrassingly public rescue that involved the ouster of co-founder and CEO Adam Neumann, there was talk that the Saudi's would sit this one out.

Courtesy of the FT

As SoftBank sees it, the Saudis owe it another chance: In the aftermath of Jamal Khashoggi's murder inside a Saudi consulate in Istanbul, SoftBank stood by the kingdom, even as Wall Street executives and other business leaders in the West cancelled plans to attend last year's Future Investment Initiative (better known as MbS's "Davos in the Desert") while publicly contemplating whether to sever all business ties to the kingdom, according to the FT.

One year later, those grievances appear to have been forgotten. But sparse attendance at Son's speech at this year's FII was seen as emblematic of the reputational hit that Son had taken in the aftermath of the WeWork blowup.

Analysts quoted by Nikkei said that unless SoftBank can pull off the turnaround at WeWork, reviving its valuation will be difficult.

"It cannot be helped that SoftBank's [WeWork] investment is seen as a failure," said Mitsunobu Tsuruo, analyst at Citigroup Global Markets Japan. "Investors are worried whether [it] will be the last negative material to affect SoftBank and its shares."

"We believe that unless the WeWork episode is resolved, SoftBank improves disclosure and clarifies its strategy, there is no solid anchor" to its net asset value, said Atul Goyal, analyst at Jefferies Securities.

On the other hand, another analyst argued that the double-digit slump in SoftBank's share price this year has completely priced in the WeWork fiasco, and that the SoftBank shares have nowhere to go but up from here.

"We think the impact of this [WeWork] event is now priced in and expect the shares to rebound," SMBC Nikko Securities wrote in an Oct. 25 report.

A successful IPO from one of the Vision Fund's 80 other portfolio companies could provide exactly the catalyst that the company needs. A listing for TikTok owner ByteDance in Hong Kong could accomplish this. Whatever happens, a successful offering will almost certainly need to happen outside of the US, since American markets have repeatedly shown this year that they have little appetite left for richly valued unicorns following a nearly uninterrupted string of IPO flops, from Uber & Lyft, to Slack, Peloton and others.

A successful IPO would certainly help, after WeWork's failed share float. ByteDance, the owner of social media app TikTok, which was valued at $75 billion in an October 2018 fundraising led by SoftBank, is reportedly considering a listing in Hong Kong.

Then again, one IPO might not be enough; many professional asset managers now see Vision Fund backing as an obvious counter-indicator, as one hedge fund manager told the FT. After all, when it comes to valuing its portfolio companies, SoftBank has been so wrong, so many times, that rebuilding trust and faith in its abilities could prove to be an impossible task.

"If SoftBank says this is the value, how much of that should you believe?" says Kirk Boodry, a tech analyst at Redex Holdings who publishes on research platform Smartkarma. One hedge fund investor says backing from the Vision Fund is "an immediate cue to sell."

And though SoftBank has scored several huge wins in recent years (it still owns a massive stake in Alibaba), investors in the Vision Fund largely missed out on those wins.

According to the FT, Vision Fund executives are counting on a $30 billion investment from Saudi Arabia for V2. But MbS has reportedly told advisors and other insiders that, while he would like to reward Son's loyalty, his advisors are vehemently against it.