There are various (troubling?) news in the media about Softbank Group (SBG, 9984 JP) and its investments, relating either directly to SBG or to its Softbank Vision Fund (SFV). These news urge me to update my SOTP Valuation for SBG posted in my prior SBG article and to decide what to do with the SBG shares I bought in October 2019.
This is not investment advice. Please read the disclaimer.
I do currently own shares of Softbank Group.
In general, Softbank employees paint a less than stellar picture of the working conditions and governance at SVF. SBG seems to push private Startup Valuations just by starting providing funding, or from funding round to founding round, showing (paper) profits.
Vitaly argues in his last SBG article that Softbank, could take on more debt in the future for funding its startups (like We Work) and for funding new versions of the Softbank Vision Fund (SVF).
Scott Galloway formulates it this way:
Masayoshi Son created $64 billion in shareholder value, mostly through deft acquisitions. Mr. Son can also boast of perhaps the best venture investment in history, $20 million into Alibaba that became $100 billion. That investment is tantamount to Michael Jordan hitting a grand slam on his first at bat wearing a Birmingham Barons hat.profgalloway.com/third-base
Mr. Son has mistaken luck in venture investing for the ability to responsibly allocate billions based on a gut feeling. The size of SoftBank investments, relative to the diligence, now looks stupid, if not negligent. A writedown on an investment in a dog-walking app may have been avoided had someone in the SoftBank diligence team taken the time to discover they were investing $300 million in … a dog-walking app.
SBGs Stake (26%) in Alibaba is its most valuable asset, currently worth c. 157 bn USD based on current PpS. A potential sale would most likely trigger substantial payments of capital gains tax, resulting in a net asset value for Alibaba of c. 110 bn USD after a 30% tax applied.
Softbank Corp or SBCs margins could be pressured through new market entrant in the future. SBC is basically the only cash generating asset for SBG, which makes it pretty clear that this company will probably not sold off significantly any time soon. A chart from The economist illustrates the divergence between Profits and Cash Flow as well as the composition of SBGs consolidated Net Debt pretty well:
Sprints (S) Stock performance was rather week since Oct 2019, based on potential blockades on the TMUS merger. If the merger doesn’t work out, Sprints future as the fourth standalone US TelCo is pretty much up in the air.
Economically, SBG sems to (page 9/100) own 60% of WeWork directly and 20% through SVF. The rescue of We Work could (a) turn the overall investment in We Co into a big win, comparable to Sons turnarounds at SBC (Japan Telco business) or (ii) hint at more such endeavors in the future risking SBGs debt profile throwing more good money after bad.
Scot Galloways writes quite negative about on Oravel Stays Pvt. Ltd. or Oyo as its service is known here with reference to a NYT article and here. Oyo seems to report false numbers and to apply forbidden business practices. This fact alone, is not as dramatic for SBG as it dirst sounds, since the invested capital is rather small (‘only‘ 1.5 bn USD). But, there is the possibility that similar proceedings take place at other funded companies and the general notion that the due diligence during investment periods might be lacking certain quality standards.
I believe, the probability for Softbank Group (SBG) to launch a second SVF and maybe even more succeeding vehicle versions (SVF II, III, …) comparable to the original structure of SVF are much lower compared to October 2019 when I wrote my prior post. If Son will be successfull pulling of the SVF II, I believe chances are that involved terms are worse for SBG and it has to come up with more equity, increasing the absolute downside for SBG.
Sum of the Parts Valuation
Figures are based on reported Financials ending Sept 30, 2019 and current market data as of 29-Jan-2020. Net Debt is probably higher than the reported figure on p. 54/100, due to the We Work rescue package as communicated in Oct, 2019.
Without any discounts and using the reported standalone Net Debt figure of c. 42 bn USD, my updated SOTP Analysis yields a NAV of 245 bn USD vs a current Market Cap of c. 90 bn USD (37% of NAV), as of January 29.
Applying a hypothetical 30% tax discount to the Alibaba stake and to the YahooJapan stake is utterly reasonable, I believe. Since SBC is basically the only cash generating asset, I believe SBG will not sell SBC, thus I do not apply a tax discount. Sprint could well be sold off, i.e. to fund SFV II, but there should be no Capital Gains Tax payable based on the low current market value. With this adjustments in place, my calculated NAV is down to 197 bn USD, with M CAP representing only 46% of NAV.
It’s the very nature of the PE business to have many (total) losses and only a big wins driving overall returns. Based on the recent results from SBG/SVF/Son I believe chances could be more skewed to the downside. To be on the conservative side, I value SBGs stake of the SVF at zero, which brings the NAV further down to 168 bn USD. Accounting for the WeWork rescue and adding another 8 bn of Debt, results in a NAV of 160 bn USD with M CAP of 90 bn USD representing 56%.
For sure, some discount is deserved for overhead costs, not accounted for in the above NAV calculations (HoldCo discount). Even using the most conservative of the above calculations results in a NAV of 160 bn, current Market Cap stands only at 56% of NAV, which I believe is too much of a discount.
I believe the two narravites for SBG / Son are still plausible, with the latter becoming less likely:
- Masa has too much money, overpaying for each and everything, funding unrealistic business ideas, or
- Masa thinks exponentially, grabs business models that others don’t, uses his hughe cash pile to slightly (over) fund his companies (big money = big strategic advantages) keeping competition at distance (No one wants to pick a fight with a crazy guy) and providing network effects within its ecosystem of startups.
I bought shares at Oct 16 last year, a bit below current prices. So right now, I could sell my relatively small position in Softbank and be done with it, even without booking a loss.
But, based on my above analyiss, I will keep my SBG stake (at least for now), keeping in mind, that it is one of my lower quality holdings and that my valuation heavely depends on its listed companies and stand-alone Net Debt.
Best , s4v