SoftBank posts 60% gain on Flipkart bet, sets aside $650 million STCG tax

SoftBank reported a 49% increase in its operating profit $6.45 billion for the first quarter

Masayoshi Son-led Japanese conglomerate SoftBank on Monday showed a gain of ¥ 164.25 billion (around $1.48 billion) on its balance sheet owing to an increase in the fair value of its stake in Flipkart, translating to 60 per cent return on its last year’s investment in the e-commerce firm. This comes ahead of the closure of the deal that will see SoftBank selling its entire 19.95 per cent stake in Flipkart for around $4 billion to Walmart.  

Not only that, SoftBank has also set aside ¥71.75 billion (around $648 million) in taxes to be paid as short-term capital gains to the Indian government, representing 43.68 per cent of its total gain from the Flipkart exit, as the sale would happen within 24 months of its initial investment in the company. SoftBank had invested $2.5 billion in the Bengaluru-headquartered company in August 2017.

SoftBank, which entered into a deal with Walmart on May 9 to sell its stake in Flipkart, did not however give any clarity on when the transaction would be closed. Walmart is investing $16 billion in Flipkart for a 77 per cent stake.

“The increase in the fair value of Flipkart was recognised to reflect the expected sales value of approximately $4 billion pursuant to the agreement SoftBank Vision Fund entered into on May 9, 2018, to sell all of its shares to Walmart,” Softbank said in its consolidated financial report for the quarter ended June 30.

SoftBank reported a 49 per cent increase in its operating profit ¥715 billion ($6.45 billion) for the first quarter, compared to a profit of ¥479 billion ($4.32 billion) in the corresponding quarter last year. Of this, the SoftBank Vision Fund reported an operating profit of ¥245 billion ($2.21 billion) largely driven by the increase in Flipkart’s valuation.

Although there was speculation that SoftBank may defer sale of its stake in Flipkart until the end of the two-year investment period to avoid paying short-term capital gains tax, the latest disclosures have given  clarity on the company’s plans. Being the largest investor in Flipkart, SoftBank is said to have been pivotal in defining the terms of Walmart’s investment in the e-commerce company, including pushing for a valuation of $20 billion in the secondary market.

SoftBank was also said to be part of a grouping that invited Amazon to offer a competing bid to Walmart to acquire Flipkart, as it looked to maximise its returns from the investment. Known as a long-term investor, SoftBank was reluctant to exit its investment in less than a year, but it was not comfortable to stay on with Walmart as the lead investor.

Finally, the firm decided to exit its investment completely after being assured that Walmart would buy its entire stake in Flipkart for around $4 billion.

The gain of around $900 million that SoftBank will see from selling its stake in Flipkart will somewhat offset around the same amount of losses the company incurred when it wrote off its entire investment in Snapdeal last year. SoftBank had tried to orchestrate a merger of Snapdeal and Flipkart, but the deal fell through leading to the company’s independent investment in Flipkart.

SoftBank has emerged as the largest backer of the Indian startup ecosystem - even larger than Tiger Global or Naspers - having invested over $8 billion in the country so far. This comes despite two of the company’s high profile investments here - Snapdeal and Housing.com - having gone sour. During a meeting with Prime Minister Narendra Modi in October 2014, SoftBank Chief Executive Masayoshi Son had said that India was the top most priority for him and the company would invest $10 billion in the country by 2024. However, given the current pace of its investment, SoftBank is expected to hit that target much earlier.

Apart from Flipkart, the Japanese firm has backed India’s largest digital payments firm Paytm, ride hailing firm Ola, budget hotel room provider Oyo, digital ads company InMobi and a few others. For now, SoftBank seems to be focused on getting its portfolio companies from India to expand overseas. Oyo, one of its early investments in India, has already entered China while Paytm is partnering with SoftBank itself to launch a payment service in Japan. Ola has already expanded into Australia.