SoftBank's big share buy-back offers only symptomatic relief. Chief Executive Masayoshi Son hates the hefty discount investors apply to the Japanese group's holdings. Offering to repurchase as much as 500 billion yen ($4.4 billion) of stock sends a strong signal of confidence. But it doesn't cure the underlying causes for SoftBank's rough treatment by markets.
Son's frustration is understandable: the group is valued at a substantial discount to the combined worth of its various holdings. Ever since its star investment, the Chinese e-commerce group Alibaba, floated in 2014, Morgan Stanley analysts reckon SoftBank shares have on average traded at a 35 per cent discount to the sum of its parts, which also include US and Japanese telecoms, Yahoo Japan, and various start-up-type investments. As of last week, this chasm had widened to 42 per cent. This is a serious markdown, especially since SoftBank's portfolio is far more focused than the usual conglomerate hodgepodge.
Even by Japan's recent shareholder-friendlier standards, the buyback is a big deal. Nomura expects Japanese companies to return a total of 4.8 trillion yen to investors by purchasing stock this financial year. It is also chunky considering SoftBank's current size: the promised sum is equivalent to almost a tenth of the company's market capitalisation before the announcement.
In other ways, though, buying and cancelling stock is a sideshow. Spending available cash just increases net debt, which is already a punchy 3.6 times EBITDA. SoftBank's recent underperformance partly reflects the fact that highly leveraged companies tend to suffer more when markets tank. Plus, the conglomerate structure is here to stay: Son aims to build a huge business over decades. That suggests a substantial discount could persist, too.
Nor does financial tinkering help address the challenges at two of SoftBank's key holdings. The company's 32 per cent stake in Alibaba, by far its most valuable investment, is down a fifth in three months. Meanwhile, shares in US mobile operator Sprint have dropped 36 per cent. Granted, there are signs of operational improvement at this business, which is 84 per cent owned by SoftBank. But net debt is a towering $31.5 billion, cash reserves dwindled to just $2.2 billion in the latest quarter, and Bernstein analysts say a full turnaround could take another three years.
The near-16 per cent jump in SoftBank's shares on news of the buyback gives Son a short-term boost. But the $4.4 billion might have been better spent shoring up Sprint's balance sheet.
Son's frustration is understandable: the group is valued at a substantial discount to the combined worth of its various holdings. Ever since its star investment, the Chinese e-commerce group Alibaba, floated in 2014, Morgan Stanley analysts reckon SoftBank shares have on average traded at a 35 per cent discount to the sum of its parts, which also include US and Japanese telecoms, Yahoo Japan, and various start-up-type investments. As of last week, this chasm had widened to 42 per cent. This is a serious markdown, especially since SoftBank's portfolio is far more focused than the usual conglomerate hodgepodge.
Even by Japan's recent shareholder-friendlier standards, the buyback is a big deal. Nomura expects Japanese companies to return a total of 4.8 trillion yen to investors by purchasing stock this financial year. It is also chunky considering SoftBank's current size: the promised sum is equivalent to almost a tenth of the company's market capitalisation before the announcement.
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Nor does financial tinkering help address the challenges at two of SoftBank's key holdings. The company's 32 per cent stake in Alibaba, by far its most valuable investment, is down a fifth in three months. Meanwhile, shares in US mobile operator Sprint have dropped 36 per cent. Granted, there are signs of operational improvement at this business, which is 84 per cent owned by SoftBank. But net debt is a towering $31.5 billion, cash reserves dwindled to just $2.2 billion in the latest quarter, and Bernstein analysts say a full turnaround could take another three years.
The near-16 per cent jump in SoftBank's shares on news of the buyback gives Son a short-term boost. But the $4.4 billion might have been better spent shoring up Sprint's balance sheet.