SoftBank Corp 9984 JP
December 08, 2014 - 4:01pm EST by
rskfrarb210
2014 2015
Price: 7,700.00 EPS 0 0
Shares Out. (in M): 1,189 P/E 0 0
Market Cap (in $M): 77,400 P/FCF 0 0
Net Debt (in $M): 40,200 EBIT 0 0
TEV ($): 117,600 TEV/EBIT 0 0

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  • Hidden Assets
  • Sum Of The Parts (SOTP)
  • Discount to NAV

Description

SoftBank is Masayoshi Son's holding company for telecom, internet, and e-commerce assets.  SoftBank's key assets are (1) its domestic telecom business in Japan, (2) a ~32% equity stake in Alibaba, (3) an ~80% equity stake in Sprint and (4) a ~43% equity stake in Yahoo Japan.  The first asset is privately-owned by SoftBank, while the last three assets are all publicly-traded.

Alibaba IPO'd on Sep 19 at $68/share.  Since then Alibaba shares are up ~55% while SoftBank shares are down ~11%.  SoftBank's market cap is ~$76bn and it owns 798mm Alibaba shares worth ~$84bn.  The result is that SoftBank now trades at a 40% discount to NAV.  That NAV is comprised of assets that can be worth more over the next several years; this is not a discount to pile of cash substitutes.  Mr. Market is effectively pricing SoftBank as if (a) it will sell Alibaba tomorrow and incur a full 32% capital gains tax rate, (b) its 80% equity stake Sprint equity is a zero today, and (c) its Japanese domestic telecom business is worth 4x forward EBITDA.  Under all of those conditions, I calculate SoftBank's NAV at ~¥7,650/share.  In an alternative future, SoftBank (a) continues to enjoy the interest-free loan provided by the Japanese and Singaporean governments to own 255mm BABA shares by deferring recognition of its unrealized capital gains, (b) realizes value for its 80% equity stake in Sprint closer to its current $15bn market value rather than zero, (c) its Japanese domestic telecom business is worth ~5x forward EBITDA, in-line with its direct competitors, and (d) receives a reduction of its NAV discount back to the ~10-15% that existed immediately following the BABA IPO.  In this future, SoftBank's NAV is ~¥16,000/share for a +100% return.  On top of this, you get a free call option on all future investments by SoftBank.

Masayoshi Son founded SoftBank in 1981 and has turned it from a tiny software distributor into a technology conglomerate with an NAV of ~$128bn.  Son is only 57 years old and his public goal is to turn SoftBank into one of the top 10 companies in the world with a market cap of more than one trillion dollars.  Son still owns ~19% of SoftBank worth ~$14.5bn, making him Japan's richest person.  At the June 2013 SoftBank shareholder meeting, Son said, "We want to be the world's number one company in various terms including profit, cash flow, and market cap."  In fact, Son has expressed his desire to never sell his current equity stakes, so I do no think it is fair to tax-effect the equity stakes held by SoftBank.

Buying SoftBank leaves you long other current and future technology investments for a nice free call option.  Two months ago, Nikesh Arora joined the company as Vice Chairman of SoftBank Corp. and CEO of SoftBank Internet and Media, Inc. ("SIMI"), reporting to Masayoshi Son.  The Indian-born executive grew up in New Delhi and joins SoftBank after 10 years at Google (pre-IPO), first running their European business operation and for the last five years as Chief Business Officer.  As CEO of SIMI, Arora will be directly responsible for overseeing the company's internet, telecom, media, and global investment activities.  Given Son's track record of success, it is not a stretch to believe that you can participate in future investment successes at SoftBank.  SIMI recently announced a $627mm investment in Snapdeal in Oct 2014 at $2-3bn valuation, making SoftBank its largest investor in the Indian online market place (i.e., 3P, eBay, etc.).  Snapdeal raised $100mm back in May 2014 at a $1bn valuation.  Snapdeal's CEO and co-founder Kunal Bahl said in an interview, "We had a lot of demand from investors.  We were very clear that SoftBank was the partner that we wanted.  We wanted a partner with a long horizon and SB demonstrated that with Alibaba, which went public 16 years after they invested.  This was a real meeting of the minds and a deep philosophical investment."  Son has announced a "strong wish and willingness to invest more like $10bn in India in the next 10 years."  SoftBank also owns an ~75% stake in Aldebaran Robotics, a French company developing 'Pepper,' a ~$1,900 robot (manufactured by Foxconn) for industrial and consumer use.  SoftBank's last earnings presentation and transcript can help you get a sense of where Son wants to go with SoftBank and how he sees the SOTP value developing over time.  ("People are worried that I might do another crazy purchase.  But someday, as time passes by, when more people start to realize that SoftBank is the goose laying the golden eggs, I believe that discount will turn into a premium.")

Several news accounts going back to the mid-90s paint Son as a driven economic animal that wants to win.  Upon SoftBank's acquisition of an 80% stake in Sprint, Son said, "I am an man, and every man wants to be number one, not number two or number three."  A New York Times story from 1995 said that Son's "rise from humble origins has become a legend here [in Japan]."  Son wears that chip on his shoulder and incorporates it into many of his business metaphors/similes/analogies.  (In describing Spring's competitive position relative to Verizon and AT&T: "It's like the poor kids fighting against the rich kids.  Sometimes the poor kids have more guts to fight the uphill battle.")

The history according to Son, in testimony before Congress:

[The U.S.] is my second home, could be the main home, I don't know. I don't know what nationality I am. I'm born in Japan with a poor family, immigrated from Korea, South Korea, way before that was China. Immigrated into the bottom of the society. In Japan, our family was one of the poorest families. As an immigrant we start from the bottom of the society. Living in Japan in the homogeneous country, all of the Japanese people are one race. It's difficult as you can imagine. It's not easy. It's a closed society.

Nowadays it's much more open, much fairer. We still have our little issues with the neighboring countries, but still now is so much better. Back then it was much tougher. Back then my family was much poorer. I once even considered committing suicide when I was a kid, when I was a student, because I'm different from the rest of my classmates. I pretend I was Japanese. I was using Japanese family name, not Korean family name. It was a tough life. I say oh, my God, even if I get education, get graduated from Number One college in Japan, what kind of job can I get as soon as I give them my resume with my real family name, which I cannot forge.

I thought all my life was horrible. My future is in darkness. My father got sick, threw up blood, and very sick in hospital. My mother cried. My elder brother, which is 17 year old, (I was 16); he quit the high school to support my family. Our family was hopeless. Then I asked the doctor of my father, is my father dying? He said no, he's going to survive, but not easy.

So my brother took his responsibility to quit the high school and support the family. I asked him, myself, should I also quit the high school. Yes, I did quit the high school in the first grade. Only three months I went to the high school. I quit in three months. But instead of working immediately in my home town I decide to come to the States, because for the short term solution my brother elder, one year older than me, he would support my family for short term solution. But if I do the same thing, we may not have the long term solution.

So I decided to come to the States to study. I studied so hard. I studied so hard. But my eyes got wide open. In this country there are so many race origin people, so many different people but treated very fairly, very equally. I saw a sky so blue; sky's the limit. So I got my American dream saying okay, some day. Some day I graduate from the college here in the States, and some day I will become a meaningful person using my Korean original name, not hiding anymore; using my original Korean name so that the other kids who suffered psychologically don't have to commit suicide.

Those people who have a small light, small hope in their life. There is another one guy who disclosed his original family name and still became one meaningful person. I want to bring the hope to those underdogs. But after I grew up, I said okay, that is one thing that I have to do, but that's not enough. I should help not only those small groups of people, one group of people, but to everybody.

I started in Computer Science. My major was Economics. Computer was my hobby, but I learned American technology, American Science, the computer technology which, you know, was invented here in this country. I learned that. Now is the time that I would like to pay back. The feeling; I am so thankful to the education that I got in the States. The American dream, the entrepreneurship, the passion, all those things, the hope that I got, I'd like to pay back. It is a debt in my heart that I have to pay back.

A 2012 profile in the WSJ described Son's history:

Son speaks often about growing up in an impoverished, ethnically Korean family crammed into a shack with no official address in Kyushu, the southernmost of Japan’s four main islands.  His father was a pig farmer who illegally brewed alcohol before settling into a more comfortable life in later years as an owner of a pachinko parlor.  Worried that his Korean heritage would make it harder to succeed in Japan, Mr. Son struck out at the age of 16 for the U.S. He has said his family, friends, and teachers didn't want him to go, in part because his father was ill. But he was resolute. America, he said, was the only place he could escape discrimination and make himself a success. His father eventually relented.

He attended Serramonte High School near San Francisco, then got an economics degree from the University of California at Berkeley. His commercial instincts surfaced early. One of his first ideas was for a voice-operated translation device to be sold at airport kiosks. He tracked down Berkeley professor Forrest Mozer, who had done work on the intersection of machines and human speech, and persuaded him to build a prototype. Mr. Son licensed it to Sharp Electronics for about $500,000.

"He didn't pay me anything," Mr. Mozer recalls. "He's all businessman."

A Softbank spokesman said Mr. Son recalled paying Mr. Mozer for his work, but declined to provide details.

An older Berkeley student named Hong Lu met Mr. Son when the future CEO walked into the ice-cream shop Mr. Lu managed. Mr. Son ordered a milkshake and said it had better be extra thick or he wouldn't pay, according to Mr. Lu.

Mr. Lu says Mr. Son soon hired him, giving him the title of "handyman." His tasks included booking plane tickets and making sure Mr. Son could still graduate from college despite his business pursuits. Once or twice, when Mr. Son was on business trips to Japan, Mr. Lu went to classes in his place, sat in the back of the lecture hall and pretended to be Mr. Son, according to Mr. Lu.

"I am where I am today because of them," Mr. Son says of Messrs. Mozer and Lu. "I'm grateful to both of them from the bottom of my heart."

A network of video-arcade machines run by Mr. Son brought in tens of thousands of dollars a month, Mr. Lu says. There was also the voice-operated translator project, a dining magazine that never launched, and a video game arcade acquired with a loan secured by Mr. Lu's house.

Mr. Son returned to Japan and founded Softbank in 1981.

Since its founding, SoftBank has made thousands of acquisitions and investments with three notable successes: (1) Yahoo Japan, (2) Vodafone KK (now known as SoftBank Mobile), and (3) Alibaba.  Originally founded as a software and IT distribution company in Japan, SoftBank expanded into PC magazine publishing.  SoftBank acquired COMDEX (trade show exhibitor) in 1995 for $800mm and Ziff-Davis Publishing in 1996 for $1.2bn.

In 1996, the CEO from Ziff-Davis introduced Son to a fledgling search-engine company founded in 1994 called Yahoo.  Son made a handshake agreement to invest $5mm in the two-year old startup that was losing money and only had a dozen employees.  Using Ziff-Davis' magazines as a reference, Son's team built a P&L model that stripped out printing, mailing, and other distribution costs, forecasting 30% long-term pre-tax margins for Yahoo.  (Yahoo did achieve a 28.9% EBIT margin in FY2000.)  After a follow-up meeting in Yahoo's offices with Yahoo's co-founders Jerry Yang and David Filo, Son said he wanted to boost the investment to $100mm.  According to the Ziff-Davis CEO who was at the meeting, Yang replied that he was flattered but that Yahoo didn't need $100mm.  Son replied, "Jerry, everyone needs $100 million."  Yahoo accepted the money and SoftBank owned a 33% stake in Yahoo at a cost of $105mm when it IPO'd in April 1996.  That same year, Son persuaded Yang and Filo to set up a joint venture for a Japanese branch of Yahoo.  Today, SoftBank is the controlling shareholder of Yahoo Japan, which holds the leading market position in search in Japan.

SoftBank's stake in Yahoo Japan is now worth ~$9bn.

Because of its success with Yahoo Japan (and Yahoo), SoftBank got caught up in the internet bubble of the late 90's and had a market cap of as much as $200-230bn (depending on exchange rates) compared to the current ~$76bn market cap.  In fact, Son was the richest person in the world for three days in 2000.  With the ensuing crash, SoftBank's share price was down 99% in the next year and Son is reported to have personally lost ~$75-85bn on paper.  (It is entertaining to pull up an old price chart)

At the bottom, after the 99% drop in its share price, SoftBank and Yahoo Japan announced the start of its fixed-line broadband service, Yahoo BB, which proceeded to give SoftBank a $1bn loss each year for four years.

The history according to Son, in testimony before Congress:

Before I started Internet access providing. Before that, NTT had 99% monopoly. Ninety nine percent monopoly. By Japanese government regulation, no one could bear to compete with NTT. By regulation. So I had a meeting with the Prime Minister and a dozen other minister and the private sector CEOs, another dozen, in one big table. In the middle there was the Prime Minister and on the opposite side I was sitting in the middle. And next to myself was the CEO of NTT. And I asked to the Prime Minster, “Prime Minister, I have a question. Do you want to save this person’s company? NTT. Or do you want to save Japan? Which is more important?” I banged the table, “Give me your answer! I don’t need any explanation or any logic, just give me one answer-yes or no? Which one is more important? The country or this company?” NTT is still, today, owned, the largest shareholder of NTT is the government. Japanese government. So Japanese government owned the company, had monopoly-99%, okay? And I said, “Japan is most expensive Internet and slowest speed Internet-is that a good thing? This is, Internet is going to lead our 21st Century infrastructure and Japan is going to fall behind.”

So I asked the question, and the Prime Minister look at both ends of the ministers and said Japan. So I said, “Well, if that's the answer, deregulate. Change the regulation. Deregulate for the sake of Japan, if you believe so.” So he said okay, let's change the regulation. Let's free up Japan. Let's bring the competition, and that moment Japanese history got changed.

After a few months waiting, we found out nobody else raised their hand. No one raised hand to compete with NTT. NTT is the biggest company in Japan. Every major company, their biggest customer is NTT. They sell their equipment. They sell their services. They sell their automobile, everything. NTT is the biggest customer, so no one want to compete. We at SoftBank Group had an Internet company. We were providing Yahoo! Japan and a bunch of other Internet service and contents companies. We need infrastructure to change, but no one want to challenge NTT.

So, I said okay. If no one want to change, we've got the deregulation, but we got no fighter. I'm going to volunteer to fight with NTT. The moment we announced that our share price tanked. Everybody said you are going to fight with the government, with the big government owned biggest company in Japan? It's impossible. So everybody start selling SoftBank stock.

The moment that I announced that we are going to start broadband fighting against NTT, that moment was the moment net bubble crashed. So I announced the fight against the biggest company at the worst timing for our company. Right before that, a few months before that, SoftBank had the glory. Our market cap because of net bubble, our market cap was $200 billion. And I was richer than Bill Gates for three days. I was so proud. I was going to say to everybody, oh, I got bigger, richer than Bill Gates.

Before I said it our stock price crashed, 99% crash, so from $200 billion to $2 billion, $2 billion, 99% crash. At the time of the bottom of the $2 billion in market cap of total SoftBank we start challenge with NTT, and we lost $1 billion a year, every year for 4 years. So total company's market cap was $2 billion and lost $1 billion in cash; half of the company's equity value we lost; flush into the toilet every year.

So everybody in Japan said well, finally, SoftBank is going bankrupt losing shop, losing everything. I was very scared. I said oh, my God, I shouldn't have banged the table. Maybe I'm saving Japan but kidding myself.

The 2012 profile in the WSJ described the same period:

The problems at the broadband unit contributed to losses for the entire company for four consecutive years. Mr. Son set up an office in a meeting room 13 floors below his executive suite to be closer to the problem unit.

He slept in the office at times and routinely summoned executives and partners for meetings late at night, says Mr. Lu, who at the time ran a U.S.-based company that supplied equipment for Mr. Son's broadband business. "He would ask our people to go to his office at three o'clock in the morning," says Mr. Lu. "You cannot think of him as a normal businessperson."

The gatherings often lasted more than eight hours, and at times Mr. Son would run on a treadmill while holding court, according to former employees. He worked out of the meeting room for 18 months, until the broadband unit had cut enough costs and moved enough customers to more lucrative plans.

Softbank and its broadband business returned to an annual profit in March 2006.

Back to the history according to Son, in testimony before Congress:

But somehow we survived. We managed to survive. After four years we became breakeven. Right after we became breakeven, I said okay, we survived, but Internet is shifting from PC to mobile. But mobile is already dominated. In the closed environment, everything dominated by subsidiary of NTT who got 60% market share and another company KDDI, which is another government kind of company.

So I said okay; I have to do a challenge again. So I acquired Vodafone Japan for $20 billion. We barely became profitable and another bet of $20 billion. That's a crazy, crazy thing for Japan, but I had a vision. We have to create the network.

Again, people called me crazy.

In March 2006, SoftBank acquired Vodafone KK in an effctive LBO that loaded up SoftBank--whose debt was already rated junk--with even more debt (~6x Net Debt / EBITDA).  SoftBank's stock went down 40% following the acquisition announcement.  Vodafone KK was the cash hemorrhaging number three competitor behind NTT DoCoMo (state-sponsoered) and KDDI, which controlled a combined 80% of the Japanese wireless market.  SoftBank paid ¥1.75tn, which was a headline multiple of ~6x LTM EBITDA but was actually a ~30x LTM EBITDA-Capex multiple.  As a mature market, SoftBank had to grow subscribers at the expense of the dominant incumbents (NTT DoCoMo and KDDI).  At the time of the acquisition, Son said that within 10 years the company aimed to overtake NTT DoCoMo, the carrier with the largest subscriber base.

Back to the 2012 profile in the WSJ:

Mr. Son cut prices, reducing monthly charges to about one-fourth of what competitors were collecting. He also was involved in the creation of a series of amusing TV commercials featuring a mixed-race family with a talking white dog as the father. The bizarre, award-winning spots helped the mobile-phone business, then a distant No. 3, add more new customers than Japan's market leaders for quarter after quarter.

Mr. Son monitored the progress almost obsessively. He had proprietary systems to collect data from cash registers at Softbank's retail stores and fed it into a display he could monitor from his desk—and, more recently, his iPad. He regularly phoned executives whose sales weren't tracking their targets, one former executive says.

SoftBank transformed the Japanese wireless industry by (1) improving network quality, (2) repositioning its brand image, and (3) leading the change for cheaper industry pricing.  The power shift away from the dominant incumbents and to a level playing field for SoftBank was helped by it being the first carrier to introduce the iPhone in 2008 and the only carrier offering the iPhone until NTT DoCoMo started in Sep 2013.

Here is what is amazing about SoftBank's iPhone exclusivity: Son obtained iPhone exclusibity from Apple by presenting Steve Jobs with a crude drawing of an "iPod phone" a full two years before Apple officially acknowledged the iPhone's existence.  What is even more amazing is that Son was seeking iPhone exclusivity even before he owned a wireless carrier!

According to Son, the meeting with Jobs came as he was planning to enter the mobile phone business. Before jumping in, he first wanted a weapon to wield against Japan's undisputed No. 1 carrier NTT DoCoMo and went to Apple with an idea for a handset.

Two years before Apple had officially acknowledged the iPhone's existence, Son called Jobs and arranged for a meeting. Son showed up with a rough sketch of what he thought an Apple phone should look like.

"I brought my little drawing of [an] iPod with mobile capabilities," Son said. "I gave [Jobs] my drawing, and Steve says, 'Masa, you don't give me your shitty drawing. I have my own," Son said. "I said, 'Well, I don't need to give you my dirty paper, but once you have your product, give me for Japan.' He said, 'Well, Masa, you are crazy. We have not talked to anybody, but you came to see me as the first guy. I give to you.'"

Before leaving, Son proposed that Jobs put down the exclusivity agreement in writing, but at that point the iPhone project was still a secret. Son asked, “Write it down and sign it for me.”

Jobs's reply? "'No! Masa, I'm not going to sign for you because you don't even own a mobile carrier yet!' "I said, 'Look, Steve, you gave me your word, I bring a carrier for Japan.' And I did," Son said.

SoftBank would later go on to buy out and rename Vodafone Japan's network in late 2006.

Wireless is a high fixed-cost business with high incremental margins, so small changes in subscriber counts can dramatically change margins.  SoftBank led the industry to cheaper pricing in order to steel subscribers from the dominant incumbents.  The strategy was successful in increasing SoftBank's market share from 16% in 2007 to 24% by mid-2014 by taking subscribers from 15mm in 2006 to 36mm in 2014.  The incremental subscribers were brought onto SoftBank Mobile at a ~40% incremental EBITDA margin, taking total EBITDA margins from 21% prior to the acquisition in 2006 to 30% in 2014, in-line with its competitors.  The sales from new subscribers at high incremental EBITDA margins helped EBITDA grow ~200% over the last 8 years since the acquisition.  The increase in EBITDA led to increased cash flow generation available to fund the deleveraging of SoftBank that effectively paid down all of the net debt incurred to acquire Vodafone KK.  By my count, cumulative EBITDA-Capex since the 2006 acquisition totals ¥1,371bn while net debt decreased ¥1,421bn from 2007-2013.  This implies high free cash flow conversion from EBITDA-Capex for SoftBank Mobile.

By 2Q13, SoftBank's consolidated operating profit exceeded that of NTT DoComo, fulfilling Son's goal of overtaking the leading carrier.  It was at this point where Son said that SoftBank would aim to become the number one company in the world and his goal was to establish a company that would continue to grow for more than 300 years.

At 5x forward EBITDA for Softbank's domestic telecom business, the business is now worth ~$56bn.

Jack Ma, founder and CEO of Alibaba, tells a story similar to SoftBank's investment in Yahoo.  In 1999, shortly after completing a $5mm investment round, Ma presented his business plan to Son.  Six minutes into the presentation, Son interrupted him, saying he should take a big investment from SoftBank as well.  Ma recalls Son saying, "You shoudl spend money more quickly."  I think it is notable that even while SoftBank stock was cratering from the crash of the dot-com bubble, Son was still making additional investments rather than suffering from cognitive biases such as loss aversion and recency effect.

In 2000, SoftBank invested $20mm into Alibaba shortly after its 1999 founding.  Alibaba established a joint venture with SoftBank to develop Taobao, which later developed into Taobao market place.  Ovr time, SoftBank invested $50mm in Taobao and also bought $30mm of shares through convertible notes.

SoftBank's $100mm cumulative investment is now worth ~$84bn.

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

Time.  Give it 3-5 (maybe 5-10) years.

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