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SoftBank’s Profit Beat Shows Its Vision Fund Is Delivering

Pavel Alpeyev
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SoftBank’s Profit Beat Shows Its Vision Fund Is Delivering

(Bloomberg) -- Masayoshi Son can’t wait to wash his hands of Sprint Corp.

SoftBank Group Corp. will stop consolidating the U.S. carrier in its results starting next earnings report, anticipating a successful merger with T-Mobile USA Inc. despite questions over the deal’s eventual closing. That accounting change will slash SoftBank’s debt load and help it shed its image as a staid telecoms company, the Japanese billionaire said Wednesday.

Son is eager to put the Sprint chapter behind him. The wireless carrier’s roughly $47 billion debt pile has weighed on its Japanese owner’s valuation ever since the latter agreed to pay $21.6 billion for a majority stake in 2012. Son in turn has repeatedly railed at investors for misjudging his company’s true value. Now, the entrepreneur can better plug SoftBank as an technology investment powerhouse, allowing him to focus his energies on the $100 billion Vision Fund and its $108 billion successor.

“For years, investors have focused on the immediate struggles at Sprint, overlooking the longer-term potential of Son’s technology investments,” said Atul Goyal, an analyst at Jefferies Group.

The accounting change will reduce the group’s overall interest-bearing debt load by about 29%. But because Sprint’s borrowings are non-recourse to the parent, meaning the Japanese company will not owe anything to its U.S. unit’s creditors, the removal of the debt from the balance sheet is largely symbolic and may not affect SoftBank’s credit rating.

Son has previously pointed out that the Sprint excision will have a significant impact on SoftBank’s annual interest expenses — as much as halving them — which amounts to an even greater reduction than in the overall debt because Sprint pays higher interest on its borrowings.

“There is still a lingering image of SoftBank as a debt-laden telecommunications company,” Son said at the briefing. “That’s quite different from the truth.”

On Wednesday, SoftBank reported first-quarter profit that beat the highest analyst estimate thanks to valuation gains from Vision Fund investments such as Slack Technologies Inc., which went public in June, hotel chain OYO Rooms and food-delivery app DoorDash Inc. The gains were offset by a 195.3 billion yen decline in the fair value of holdings including Uber Technologies Inc. Operating income in the three months ended June slipped 3.7% to 688.8 billion yen ($6.5 billion), but trumped the 345.3 billion yen average analyst estimate. SoftBank also said the Vision Fund held 81 investments worth about $66.3 billion.

The Sprint accounting change signals Son’s confidence in sealing the deal. While the Justice Department approved the acquisition last month, the transaction has been held up by an antitrust lawsuit by more than a dozen states including California and New York. Texas was the latest to join the fight last week. The deal already has the approval of the Committee on Foreign Investment in the U.S. and Federal Communications Commission Chairman Ajit Pai has expressed support.

“There hasn’t been a case in history where you had those three approvals and the deal didn’t get done,’’ Son said.

Sprint has been profitable for only one of the past five years. It accounted for 38% of SoftBank’s revenue in the three months ended June, slightly less than the company’s domestic telecom operations.

Son originally considered buying T-Mobile in 2014 before abandoning the effort when officials at the FCC and Justice Department signaled they were against a theoretical merger with Sprint. Another attempt at a merger fizzled out in late 2017 amid disagreement over control. SoftBank finally agreed to sell Sprint to T-Mobile in 2018, getting about a 27.4% stake in the resulting entity in return.

The billionaire acknowledged that his Sprint purchase has been largely seen as a failure, but said that SoftBank generated a 21% rate of return on the deal. All but 400 billion of the 2.1 trillion yen acquisition came from borrowing, he said. That smaller proportion of shareholder value has tripled to 1.3 trillion yen, “not bad at all as an investment.”

“From a sentiment perspective, Sprint got in the way of a lot of investors, who thought of it as a bad deal,” said Chris Lane, an analyst with Sanford C. Bernstein & Co. “This at least cleans up a mess. It’s a good save and allows them to move on.”

Last month, Son announced that he’s setting up a second Vision Fund. SoftBank is committing $38 billion in capital itself and expects to collect money from Apple Inc., Microsoft Corp., Foxconn Technology Group and the sovereign wealth fund of Kazakhstan. He also won broad support from Japanese financial institutions, with seven of them identified as signing memorandums of understanding to participate.

“The merger of Sprint with T-Mobile and Vision Fund 2, these are great milestones for SoftBank,” Son said. “The only way from here is forward.”

To contact the reporter on this story: Pavel Alpeyev in Tokyo at palpeyev@bloomberg.net

To contact the editors responsible for this story: Edwin Chan at echan273@bloomberg.net, Vlad Savov

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