SoftBank Group Corp. (OTCPK:SFTBF;OTCPK:SFTBY) changed its business model several times during its close to four decades long history. It started as a retailer of computer parts in 1981. Just the next year they entered the publishing business as well (though admittedly with computer related publications). In the nineties, SoftBank's founder and CEO Masayoshi Son diversified into a wide range of internet based services, most notably by founding Yahoo Japan (OTCPK:YAHOF;OTCPK:YAHOY) as a joint venture with Yahoo, today's Altaba (AABA). From 1999 to 2006 SoftBank even owned an actual bank, SBI Group (OTCPK:SBHGF). Arguably the biggest change to the companies business model yet came in 2006 when it acquired Vodafone Group plc's (VOD;) Japanese operations and rebranded the company "SoftBank Mobile", turning into essentially a network operator - albeit one with a number of more or less unrelated other investments such as a stake in a Chinese stake in a Chinese start-up by the name of Alibaba (BABA) or a professional baseball team. The focus on mobile operations was further underlined by the acquisition of American operator Sprint Corporation (S) in 2013. Nonetheless, SoftBank continued to conduct further investments -using both the profits from its core business(es) and a considerable portion of third party capital- in a variety of companies deemed promising by its leader, Mr. Son, all along the way turning it more into a technology focused holding company than a pure telco operator.
SoftBank founder and CEO Masayoshi Son; source: SoftBank Investment Advisers
The latest paradigm shift began in 2017 when SoftBank launched its Vision Fund, a $100 billion vehicle investing in a variety of innovative, mostly technology driven companies across different sectors, and secured massive financial backing from outside investors for this purpose. The fund is the biggest technology fund in history by far. Nonetheless, SoftBank is already planning the launch of a second fund of similar size. Moreover, it already launched a smaller (though not exactly small in absolute terms) regional venture fund investing in Latin America.
Thus it becomes less advisable in my opinion to value SoftBank like a holding company. Following, I will explain the reasons I see to do so in more detail.
In 2017 SoftBank acquired Fortress InvestmentGroup LLC for $3.3 billion, representing a nearly 40 percent premium on its stock price. Notably, Rajeev Misra, a former investment banker with Deutsche Bank (DB) and Swiss UBS Group (UBS) and currently the CEO of SoftBank investment Advisers as well as a board member of the parent, had a brief stint as a senior partner at Fortress.
Rajeev Misra, CEO of SoftBank investment Advisers and former partner at Fortress; source: SoftBank Investment Advisers
Fortress is not particularly technology driven or focused on innovation. Its portfolio differs a great deal from SoftBank's. Given the overall size of SoftBank as a whole -and especially given the considerable premium that it paid for the acquisition- Fortress neither qualifies as a cash generator for its new parent. Notably, SoftBank waived day-to-day control of Fortress in order to gain CFIUS approval for the acquisition. Consequently, Fortress continues to operate as an individual business within the SoftBank Group. So all in all, it does not become obvious right away what compelling reason there might be to justify buying it.
However along with Fortress it is safe to assume that SoftBank acquired important know how. The main reason behind the acquisition of Fortress must have been to assist SoftBank's transformation into more of an investment company. This is also indicated by statements that involved persons made publicly.
SoftBank has also begun to decrease the importance of its telco business. In December of 2018 it divested a third of its Japanese carrier SoftBank Corp. via an IPO generating proceeds of ¥2.65 trillion (at the time of the IPO just shy of $24 billion). SoftBank also effectively transferred its stake in Yahoo Japan to SoftBank Corp. via a transaction in which it sold its stocks to Yahoo Japan in order for them to be retired while at the same time Yahoo Japan issued newly created stocks to SoftBank Corp. This strikes me as somewhat of a "backdoor divestment" of Yahoo Japan.
If and once US regulators will grant their approval for the planned merger between Sprint Corporation and T-Mobile US, Inc. (TMUS) SoftBank would furthermore retain a mere 27 percent stake in the combined entity instead of the 85.87 percent majority it owns of Sprint at the moment. While this is not strictly speaking a divestment it still further decreases the importance of the telco business for SoftBank. It would also make future divestments somewhat easier to no longer be the majority owner or biggest shareholder - which after a merger would be Deutsche Telekom AG (DETGF).
Creation Of Investment Funds
Now I will come to the core of SoftBank's ongoing transformation: the creation of technology focused investment funds. As of today there are already three of them whit plans for more in the pipeline. In the following I will present the existing funds in detail and take a look what might be still to come.
The Vision Fund is arguably the first (and at least at the time of writing only) fund of its kind. It invests in a variety of companies, many of them rather young (yet often not really start ups in a narrow sense anymore), from different -though all somewhat technology driven- sectors. Investments usually begin at about $100 million but in some cases reach multi-billion dollar volumes. An overview of the portfolio (including which members of its team primarily oversee each investment) can be found here.
So into which category does the Vision Fund fit? Given its portfolio, one might tend to see it as a (late stage) venture fund; a really big one admittedly. It also resembles private equity funds in some regards. In a previous article I tried to describe it as "a venture fund structured as a private equity fund".
SoftBank through its subsidiary SoftBank Investment Advisers serves as the general partner. Limited partners include Apple Inc. (NASDAQ:AAPL), Qualcomm Inc. (NASDAQ:QCOM), Sharp Corporation (OTCPK:SHCAF) (OTCPK:SHCAY) and Foxconn Technology Group (OTC:FXCOF). However, the biggest investors in the fund are the Saudi Arabian Public Investment Fund ("PIF") and state-owned Emirati Mubadala Investment Company, which committed $45 billion and $15 billion, respectively.
Rajeev Misra, Masayoshi Son and H.E. Yasir al-Rumayyan, Managing Director of the Saudi PIF and board member of SoftBank Group Corp.; source: SoftBank Investment Advisers (November 2018; the image has been removed from the website since)
However, SoftBank did not contribute its share in the fund in cash primarily. Instead it transferred assets including its share in Uber (UBER) and 24.99 percent of British chip-designer Arm Holdings Ltd. (a 75.01 percent stake in the company remains with SoftBank itself) to the fund.
All in all SoftBank contributed $28.1 billion to the Vision Fund while outside investors contributed a total of $63.6 billion. However, outside investors hold 62 percent of their respective investments through preferred shares (7 percent coupon). SoftBank's stake on the other hand consists entirely of equity shares. As Oaktree's Howard Marks (somewhat critically) points out in one of his famous memos this gives SoftBank an outsized share in the funds equity while at the same time securing leverage at rather favorable terms for the fund.
On the other hand, it also means, that the coupon payments on the preferred shares will most likely outweigh the management fee that investors pay. This would certainly be a factor to be considered when calculating a valuation for SoftBank based on assets under management.
While it is referred to "the Vision Fund" for the sake of simplicity, it should be noted that there is not strictly speaking one $100 billion fund (careful readers might have noticed above that the math did not add up to 100 billion) but two funds, the Vision Fund and another, separate entity called the Delta Fund which together account for the notorious $100 billion. The Delta Fund (which has a volume of $6 billion with SoftBank accounting for $4.4 billion) was set up to invest in ride-hailing companies other than Uber without using Saudi money, as Saudis apparently are reluctant to fund direct competitors of Uber in which they separately own a considerable stake through the PIF.
Latin America/The Innovation Fund
SoftBank recently announced the launch of a new venture fund focusing on South American start-ups. The entity which will be named SoftBank Innovation Fund will have a volume of $5 billion, two of which Softbank, which will serve as general partner, has already committed. According to Rajeev Misra Rajeev Misra the Vision Fund "will have the ability to co-invest alongside the innovation Fund". The new fund will be lead by SoftBank's COO, Marcelo Claure a Bolivian native and former entrepreneur.
SoftBank Group COO Marcelo Claure; source: SoftBank Group Corp.
While a volume of $5 billion sounds outright tiny compared with the Vision fund, it still is a huge sum for a venture fund. Its sheer size gets even more apparent if you keep in mind that the fund does not operate in Asia or the US but in Latin America. Just to give you a perspective: according to techCrunch Latin American start ups secured a combined $2.5 billion in all of 2018. The Innovation Fund could have financed the entire start up activity of a year. Twice.
As it did with the Vision Fund, SoftBank will once again transfer assets to the Innovation Fund: SoftBank will transfer its stake in Colombian delivery start-up Rappi -in which the Vision Fund has invested too- to the the fund.
More Funds Planned
Despite its giant volume, much of the Vision Funds capital has already been spent. Yet instead of slowing down Mr. Son seems eager to even increase it. For this purpose, SoftBank is already planning to launch a second Vision Fund. In fact he says he wants to raise a new $100 billion fund every two to three years.
Information regarding who might be potential investors for a second Vision Fund was not available at the time of writing. However, there is speculation that SoftBank could launch the fund entirely with its own capital before inviting third parties to participate.
At the same time the existing Vision Fund might be expanded by new capital as well. According to various media reports negotiations about an investment of $ 1 billion or more from Oman are ongoing.
Due to what has been described above I believe that SoftBank is in the process of transformation into more and more of a investment company. Attempts of valuation should definitely take that into account. However the funds that SoftBank has launched or plans to launch are somewhat entities of a class sui generis meaning there are no peers yet to consider in order to find the right valuation. Furthermore, due to the structure of especially the Vision and Delta Funds SoftBank holds an equity stake of considerable size in its own funds. With regards to future funds investors should have an eye on wether SoftBank will be able to continue to attract investments at the same conditions.
Also, SoftBank continues to conduct investments outside of its funds. For instance most recently its commitment to invest about one billion dollar (€900 million) in the German payment provider Wirecard AG (OTCPK:WRCDF;OTCPK:WCAGY)has been announced. I have previously written about this particular deal and why I consider it a win-win situation on Seeking Alpha.
Neither should one forget that the company still holds large positions in Alibaba as well as in SoftBank Corp. and Sprint. Other than for example the 75.01 percent in Arm Holdings it still owns it is rather hard to imagine those positions being transferred to future Vision Funds. Thus, while the transformation continues, elements of a holding company will most likely persist for quite some time to come, inevitably making it harder to come to a definitive method of valuation.
Lastly, I would caution that an investment company does not necessarily have to be the final shape of SoftBank. I consider it not impossible that another transformation might begin at any point in the future. The company could be something totally different in ten years. After all, history holds precedent that you never know with Masayoshi Son.
Disclosure: I am/we are long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: All research contained in this article was done with utmost care. However, I cannot guarantee accuracy. Every reader is advised to conduct his own due diligence and research.
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