Japanese conglomerate SoftBank Group (OTC:SFTBY) may be spinning off its mobile phone business in an effort to raise more capital. According to CNBC, Softbank will sell 30 percent of its shares of this subsidiary and raise 2 trillion yen ($18 billion), making it one of the biggest Japanese IPOs in decades.
The initial report stated that Softbank would apply for an IPO in the spring, and would launch in Tokyo at some point between March and May to be possibly be followed by going public in London in the autumn. However, Reuters reported that Softbank made an official statement that while launching some an IPO was a potential strategy to raise capital, no such decision had yet been made.
If Softbank plans to move forward with such plans, it would find a new and willing audience and would be able to further fund its aggressive investing strategy into tech companies across the globe. Softbank and investors would gain alike, and so everyone should hope that this denial is just a temporary brake which will give way to an interesting IPO.
Funding Investment
Softbank is one of the most complicated companies in the world, with a wide array of holdings across the world including Sprint and Alibaba (NYSE:BABA). Group Chairman and CEO Masayoshi Son has been burning through cash for years to fund these acquisitions, and that was before the establishment last year of the $100 billion Vision Fund backed by Softbank’s holdings and funds from businesses and government across the globe. The Vision Fund has investments in public and private companies such as NVIDIA (NASDAQ:NVDA), OneWeb, and SoFi, and it is clear that Son wants to essentially become the Berkshire Hathaway (NYSE:BRKa) of tech companies.
But that requires funds, and Softbank has had debt problems for years. Its bonds are below investment grade with Moody’s and S&P, and yet it wants more capital to fund further acquisitions. By creating the Softbank Group spinoff focused on its successful and profitable mobile phone business, it can raise capital without incurring additional debt.
The spinoff also has other benefits for the parent company. Cautious investors who would be leery of Softbank’s bold forays into multiple tech companies may be perfectly happy to look into the more stable spinoff. Son would be free to focus on technology as appears to be his inclination, and his company would have additional capital to make investments which could pay off massively over the long run.
Softbank Group’s Prospects
If Softbank was to spin off its mobile business, it would raise capital for its tech investments, attract interest and investors, and designate a smooth delineation between its mobile phone business and its investments. But how would the mobile phone business fare?
As noted above, it is stable and profitable. The Washington Post reports that Softbank’s phone service accounts for 36 percent of Softbank’s revenue yet 67 percent of its operating income. Japan is famously phone-happy, and its profitability means that the spin off could get loans at lower rates compared to the parent company. Confidence in the Japanese economy also appears to be improving thanks to growth for seven straight quarters, though there are continued concerns about how demand will grow with the demand for men’s facial moisturizer as the population rapidly ages and shrinks. Any spinoff would also face intense competition from cheaper phone carriers and the need to keep up with advancing technology.
Nevertheless, there is every reason to believe that a Softbank mobile phone spin off would be a reliable, profitable company worthy of investment.
Will There Be A Spinoff?
Given that Softbank has not indicated that it intends to launch a spin off at all, it is possible that this speculation becomes sound and fury signifying nothing. But if it does move forward, this would be a huge, highly interesting move which could benefit investors as well as both companies alike.
It should be noted that there are some downsides. If Softbank spins off the most profitable part of its company, investors may feel that Softbank is nothing more than a colossal pile of debt and investments which may not pay off quickly enough. Softbank would also have a harder time funding future acquisitions in the long run as some of the phone company’s profits would have to be diverted to pay shareholders.
But the risk is probably worth the reward, and investors should be positively interested if Softbank decides to go through with the maneuver. The fact that Softbank is willing to treat assets like tradeable commodities is a good sign for a company aiming to become the investment tech company of the world.