It's time for SoftBank Group to stop buying and start selling

SoftBank Group Corp.’s prolific spending on startups and listed companies underpins founder Masayoshi Son’s entire strategy, driving both earnings and share price. But such massive outlays have forced its balance sheet into a hole that suggests the only way out is to start selling.
 

Net income at the Japanese company dropped 39% for the June quarter, while profit at its eponymous investment unit plunged almost 90% amid a decline in the share prices of key holdings like ride-hailing provider Uber Technologies Inc. and e-commerce company Coupang Inc. Such swings have become a normal feature of SoftBank’s earnings as it rides the peaks and troughs of stock market and startup valuations.

Another key metric of its financial position has plunged to the lowest level in almost three years, and it’s one that can’t be papered over by a rebound in share prices. SoftBank’s current ratio — which measures current assets divided by current liabilities — fell to 0.78. A figure less than one implies that more money is due than the amount of liquid assets currently available. The assets side of this equation largely comprises cash and accounts payable, which dropped, while the debts are chiefly loans and bonds to be paid within the next 12 months, and they rose.

Among the recent expenses was 101.4 billion yen ($919 million) on new shares in The We Co. (better known as WeWork) — the troubled rental startup that almost collapsed two years ago before a SoftBank bailout. The company also put $800 million into its new Latin America Fund, part of plans to find new growth outside of Asia. To pay for these deals, though, the firm once again dipped into its Alibaba Group Holding Ltd. piggy bank to take out a $1.88 billion margin loan, using its shares in the Chinese e-commerce startup as collateral. 

This past year has not been an opportune time to use Chinese tech companies as backing for loans. Alibaba is among peers caught up in a series of crackdowns over concerns ranging from data protection to antitrust breaches, driving its stock down almost 40% from a high in October.

SoftBank’s cash position is further pressured by the increasing likelihood that its $40 billion sale of British chip designer Arm Ltd. to Nvidia Corp. will fall through, with even the UK government concerned about the transfer. Failure, or even a delay, of that deal could be a huge blow. The US maker of graphics chips is set to cover $12 billion of its purchase in cash, and that can’t happen until the transaction is complete.

The last time SoftBank’s current ratio was this low, in September 2018, it got out of the hole by offloading shares, including the $4 billion sale of its position in Indian e-commerce startup Flipkart, as well as stakes in US and Japanese telecom operators T-Mobile US Inc. and SoftBank Corp. At that time, the company also used its holdings of Nvidia Corp. — bought in the open market well before the Arm deal — and Alibaba as backing for more loans.

But most of those assets are unavailable now. SoftBank could keep borrowing against Alibaba, but that well is almost dry. Instead, it will likely need to offset the most liquid of its holdings, which include a $5.6 billion stake quietly built in Amazon.com Inc., $812 million of Taiwan Semiconductor Manufacturing Co., and $702 million in PayPal Holdings Inc.

Then there are the unicorns. Most of the big names in the Vision Fund have already listed — among the most recent being the June offering of Chinese ride-sharing provider Didi Global Inc., food-delivery operator DoorDash Inc. and Coupang. SoftBank still holds onto its stakes in these companies, but that will need to change as debt payments loom. There’s also ByteDance Ltd., the company behind short-video service TikTok, among the last of the cash cows available. But its public share offering, most-recently slated for Hong Kong, will inevitably be caught up in Beijing’s continued scrutiny of technology companies, making it an unreliable source of cash anytime soon.

But those debts can’t wait. Bankers and bondholders expect that 8.6 trillion yen ($78 billion) due in the next 12 months to be repaid on time, which means further investments will need to take a backseat to selling assets and raising cash as SoftBank proves to shareholders and creditors that its spending spree was worth the bet.