Softbank gets $11 billion from selling just part of its huge Alibaba stake

The deal was first unveiled in 2016 and was slated for June

SoftBank Group Corp. will book a pretax profit of 1.2 trillion yen ($11.1 billion) for selling part of its stake in Chinese e-commerce leader Alibaba Group Holding Ltd., completing a deal announced three years ago.

Masayoshi Son’s investment giant said Tuesday it had fulfilled a deal unveiled in 2016, delivering 73 million American Depositary Shares in the online mall operator as agreed to under a forward sale contract. SoftBank, Alibaba’s biggest shareholder, was selling shares in the Chinese company for the first time in 16 years as it looked to strengthen its balance sheet and step up investments in startups.

Son opted for the extremely complex transaction -- rather than, say, just selling Alibaba shares -- so that he could retain some upside if the stock rose while realizing gains. The deal was part of broader move to sell assets, including stakes in Supercell Oy and GungHo Online Entertainment Inc. The divestments made it possible for Son to buy chip designer ARM Holdings Plc for $32 billion and set up his $100 billion Vision Fund, which has backed Uber Technologies Inc. and Slack Technologies Inc.

“The complexity of the deal made it really hard to understand,” said Tomoaki Kawasaki, an analyst at Iwai Cosmo Securities Co. “But at the time, investors welcomed Son liquidating some of his holdings. And it has worked about exactly as he promised.”

The Japanese company’s shares have gained 27% this year.

SoftBank still holds about 26% of Alibaba after the deal. The total value of the conglomerate’s publicly-traded shareholdings, which also include its own domestic telecom operations, Sprint Corp. in the U.S. and a stake in Yahoo Japan Corp., was 19.7 trillion yen at Tuesday’s close. SoftBank’s market cap was 10.2 trillion yen. By the company’s own estimation, there is a discount of about 50%.

At the time of the announcement, investors saw the deal as a sign that Son, who built his corporate empire by borrowing heavily to finance acquisitions, was willing to sell and tackle debt. But the complexity of the transaction also created uncertainty for SoftBank’s balance sheet. In the year ended March 2018, the company booked a 425 billion yen derivative loss, while forecasting a reversal to 1.2 trillion yen profit by the settlement date this month.

“These days SoftBank is booking a lot of profits from its Vision Fund investments, which are all paper gains,” Kawasaki said. “In a way, this serves as a reminder to investors of the kind of profits that are possible when SoftBank does cash out.”

Son had credited SoftBank’s former President Nikesh Arora with spearheading the Alibaba deal, when the former Google executive stepped down in 2016. Arora also helped oversee the sale of the GungHo stake for 73 billion yen and the $8.6 billion sale of Clash of Clans-developer Supercell to Tencent Holdings Ltd.

The Japanese billionaire has said he is in the process of looking for investors for a second giant fund, which will also be around $100 billion. That raises the question of what assets he might sell to pay for SoftBank’s own stake in it. Alibaba is said to be considering raising $20 billion via a second listing in Hong Kong after a record-breaking 2014 New York debut, which may offer Son an opportunity to offload more shares. But lowering the stake below 20% would remove Alibaba from SoftBank’s consolidated balance sheet, Iwai Cosmo’s Kawasaki said.

“Son might want to do that if he thinks that Alibaba’s growth is done,” he said. “It certainly doesn’t look that way right now.”