SoftBank: mystery meat
Doubts over Masayoshi Son’s wheeler dealing have deepened, fostered by opacity of bank’s account
Masayoshi Son extolled the consistency of McDonald’s, even as he apologised for sketchy due diligence on WeWork. It was a risky reference. McDonald’s classic burger contains only beef. SoftBank’s quarterly results are composed of the financial equivalent of mechanically reclaimed meat from multiple sources. That intriguing bit of gristle in the middle was a $4.6bn writedown on a disastrous investment in the US-based serviced offices group.
Pessimists reckoned the hit should have been bigger. At least SoftBank’s founder fessed up to an error sceptics such as Lex thought he might sweep under the carpet. The quarterly net loss of $6.4bn was the first in 14 years, as investment valuations plummeted. Doubts over Mr Son’s wheeler dealing have deepened, fostered by the opacity of SoftBank’s accounts.
This is apparent in the business’s tendency to disown debts of fiefs to keep a lid on its own heavy leverage. By waiving majority voting rights, SoftBank can account for WeWork as an associate and not a subsidiary, keeping $22bn of borrowings off its balance sheet.
It has marked down the fair value of WeWork’s equity from $47bn to $7.8bn. Is this just the beginning? The reduced valuation is highly sensitive to shifts in free cash flow. The impact of the $9.5bn debt and equity bailout has not been accounted for yet.
The Vision Fund, the Saudi-backed vehicle with which SoftBank is incestuously entwined, wrote down the fair value of 22 other investments. A combined fair value of $77.6bn for 88 portfolio companies was just a 10th higher than initial investments.
SoftBank’s P&L is composed of revaluations, non-cash income from affiliates and modest flows of dividends and disposal proceeds. Its enterprise value is the subject of a debate medieval theologians would find abstruse. Lex, using S&P data, estimates the group trades at one-third less than the value of its investments. Bernstein’s Chris Lane calculates a stonking 48 per cent discount.
The shares have fallen 28 per cent since an April peak. This was supposed to be the year Mr Son’s bets came good. A demerger late last December was meant to inject the value of a Japanese mobile phone operation into SoftBank’s share price. US flotations were intended to do the same for forays into US tech. Instead, Mr Son has depended on his longstanding investment in Alibaba to prop up market value. That is the closest SoftBank ever gets to consistency.