Softbank Corp (Stub Short) 9984 JP S
April 23, 2008 - 10:10pm EST by
greenshoes93
2008 2009
Price: 2,080.00 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 2,253K P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT
Borrow Cost: NA

Sign up for free guest access to view investment idea with a 45 days delay.

Description

Softbank is a Japanese multi-national holding company run by Masayoshi Sun comprised of wholly owned, majority and minority owned public/private consolidated and non-consolidated subsidiaries operating in the telecommunications, media and technology sectors. The company consists of over a hundred consolidated subsidiaries and 65 equity-method subsidiaries. Softbank’s major wholly owned businesses include its broadband business, Japan telecom (fixed line telecom business) and former Vodafone KK (mobile business). Softbank also has large stakes in Yahoo Japan, Alibaba and Yahoo. 

 

Beginning with the background, Softbank acquired the mobile business, the primary asset of any value, in an LBO type transaction from Vodafone in April 2006. The business was poorly managed by Vodafone which standardized handsets across its subsidiaries around the world without regard to differing consumer preferences in each market. While Softbank paid a high multiple for the business, around 8x EBITDA (high for a slow growth, highly penetrated market like Japan) the intention of Son was to raise margins through its Yahoo Japan relationship (Yahoo Japan web buttons on phones), reinvigorating the handset lineup and a better quality brand name in Japan, Softbank vs. Vodafone. The stock ran on the strategy as well as Son’s charisma while fundamentals in the business began to deteriorate. A Barrons article in August/September of 2006 discusses initial red flags in the business, but I couldn’t seem to find a link to include here. In December 2006, in an effort to reduce the rate on the bridge loan from the acquisition, Softbank securitized all debt related to the mobile business with receivables and assets of the mobile business and essentially de-linked the debt from the balance sheet at the holdco level. In 2007, Softbank began cutting prices and later adopted a handset installment sales method and consequently a pricing war ensued with Docomo and KDDI.

 

In this trade, we short the Softbank stub by shorting Softbank (9984 JP) and go long a proportional amount of Yahoo, Yahoo Japan and Alibaba, essentially isolating the misvaluation in the mobile business. The stub looks misvalued due to accounting irregularities and deteriorating fundamentals in the mobile business, due to changes in pricing.

 

New Pricing Plan:

The company began offering a new pricing plan last year with extremely low monthly fees, free calling to anyone about 16 hrs a day, free Softbank to Softbank calling and a handset for free upfront with installment sales in which the subscriber pays for the handset for the last 24 months of a 26 month contract, where Softbank is partly subsidizing the handset.

 

Three Major Issues Associated with New Pricing:

(1)     Softbank is booking handset revenue upfront and accounting for the lack of cash flow with a handset receivables line item and extremely high negative working capital changes, so while earnings are growing from handset sales, cashflow is deteriorating and from a DCF perspective the business is worth almost nothing. Moreover, when the street compares profitability between operators, they look at EBIT, which is ridiculous in this case given the lack of cash flow from new subscribers

(2)     Since they’ve been attracting subscribers with low priced plans and free internal calling, net adds have looked great, but most are children and elderly people with a virtually non-existant ARPU. In terms of incremental ARPU, for the FY 3/08, assuming the base subs ARPUs are not changing, the 15% increase in subs results in a 15% decrease in ARPU, thus the incremental subs are pretty low ARPU. As they continue to push the white plan, ARPUs will continue to drop off and when that finally stabilizes, there will be no new handset revenue

(3)     In the handset receivables balance sheet item, they are not accounting for very much in bad debt reserves from phones, so we could potentially see writedowns here in the future

 

This model looks wrong on so many levels. First, they are turning a company with measurable invested capital in a network into a technology distribution business, subsidizing handsets and distributing them to new customers at a very low ARPU. Also, from a NPV perspective, a dollar realized today is obviously better than one two years from now, from handset installment sales, especially when Softbank is paying for the handsets upfront. Finally, as I’ll show below, regardless of the installment sales and degradation of the business, IE projecting ARPUs and associated margins two years from now when they have no more new customers to sign up to inflate revenue and EBITDA but incredibly low ARPUs, the stub still looks expensive on 3/09 FY numbers that the street is projecting vs. its competitors, which are actually profitable.

This business is basically being run fraudulently with inflated revenue and earnings but no cash flow to back it up.

Additional shady issues include rumors that analysts with sell ratings have been threatened to ‘improve’ their analyses (I spoke to an analyst for a bulge bracket that depicted a very different picture to me once than was in his report). Thankfully this is anonymous so Son can’t come hunt me down! Also, Goldman had been their banker for years but pulled out of a credit facility last year pretty suspiciously. Finally, we can’t forget that there’s an extraordinary amount of leverage on this business, 5x consensuses EBITDA (which doesn’t take into account a loss in handset installment sales and the actual degradation of the business).

 

I’ve copied my Softbank SOTP model below and will walk through the general assumptions; if I gloss over anything, please question me. 

 

The top right is pretty self explanatory; Softbank share price, shares outstanding, Yen/Dollar exchange rate, date and yen HK$ exchange rate. Next, I list the public companies in which Softbank has a share, noting which are consolidated in Softbank financials. For the consolidated subs, we back out EBITDA and net debt from the Softbank reporting segment in which they are classified. We list prices in Yen, number of Softbank shares and total value as well as value per Softbank share in order to calculate the stub at the bottom.

 

Under Non-pub consol subs, we list the Softbank ownership in the portion of Alibaba that is not public and value it at the FD carrying value Yahoo uses.

 

Next, we list the other non-consolidated subsidiaries that Softbank has that are of great value. Historically, (pretty much only bc of Yahoo Japan and Alibaba), Softbank has returned 3x its invested capital in these startups, so in order to be conservative on the short, we value all these at 3x invested capital.

 

Next, we look at Softbank’s venture capital funds which we value at 20% returns. I’ve gotten stats from some LPs on these funds and the returns aren’t close to what we’re valuing them here, 20% IRRs. Next, we look at Softbank’s consolidated operating subsidiaries, taking out the value of the consolidated public companies. In the stub I’ve built, we only short out Yahoo, Yahoo Japan and Alibaba, so I only take out the consolidated EBITDA and net debt of Yahoo Japan.

 

For the reporting segments, my estimates are based on street numbers and I value each business using the EBITDA multiples listed based on growth and margins in each business.

 

In order to calculate the value of the stub, we take the Softbank share price and back out the value per Softbank share of Yahoo Japan, Alibaba and Yahoo. This gives us a current Softbank price of 552 yen vs. our fair value of 309 yen, thus a 44% downside.

 

However, this estimate is conservative. When I run a DCF on the cashflows from the mobile business, given the high changes in working capital and the network investment cost (Vodafone underinvested in the network), we get fair value of the mobile business of 75 yen vs. 236 yen when we use a 5x EBITDA estimate in the analysis below. That brings down fair value of the stub from 309 yen to 148 yen, thus 73% downside.

 

 

 

 

Softbank Sum of the Parts

 

 

 

 

 

 

 

9984

 

 

 

 

 

 

 

 

 

Price

2080

 

 

 

 

 

 

 

 

S/O

1080.4

 

 

 

 

 

 

 

 

Exch Rt

103.55

 

 

 

 

 

 

 

 

Date

4/23/08

 

 

 

 

 

 

 

 

HK$ Exch Rt

13.2819

 

 

 

 

 

 

 

 

 

 

Consol

 

Ticker

Price

Shares

Value

Per Share

3/09 EBITDA

 

 

 

Yahoo

YHOO

2,907.7

52.3

151,933

140.63

 

 

 

 

Alibaba

B28Q94

162.3

1196.0

194,122

179.68

 

 

 

Y

Yahoo Japan

4689

52,300.0

24.9

1,304,771

1207.67

157205

 

 

 

UTStarcom

UTSI

317.3

14.7

4,650

4.30

 

 

 

 

GungHo

3765

211,000.0

0.0

8,175

7.57

 

 

 

Y

Broadmedia

4347

200.0

23.2

4,631

4.29

1400

 

 

Y

Softbank Tech

4726

950.0

5.4

5,099

4.72

2200

 

 

 

Vector Inc

2656

83,500.0

0.0

2,689

2.49

 

 

 

 

Cyber Comm

4788

72,800.0

0.0

1,905

1.76

 

 

 

 

MP Tech

3734

50,000.0

0.0

887

0.82

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1553.93

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non Pub Non Consol

 

Percent

Total

 

 

 

 

 

 

Alibaba (Non-Public)

 

29.30%

517,750

106,191

98.29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Non-Consol Subs

Investment

Implied Ret

Value

 

 

 

 

 

MPT BB

50

3.0x

 

150

0.14

 

 

 

 

Telecom Service Co

495

3.0x

 

1,485

1.37

 

 

 

 

ValueCommerce

833

3.0x

 

2,499

2.31

 

 

 

 

NC Japan KK

375

3.0x

 

1,125

1.04

 

 

 

 

IMX

718

3.0x

 

2,154

1.99

 

 

 

 

Movida Holdings

100

3.0x

 

300

0.28

 

 

 

 

Avanquest

100

3.0x

 

300

0.28

 

 

 

 

CJ Internet Japan

1100

3.0x

 

3,300

3.05

 

 

 

 

Fishing Vision Co

1141

3.0x

 

3,423

3.17

 

 

 

 

Nihon Eiga Satellite

333

3.0x

 

999

0.92

 

 

 

 

E-Book System

182

3.0x

 

546

0.51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Overseas Funds

Softbank Inv

Size

Return

Value

 

 

 

 

 

SOFTBANK Tech Vent

3365.375

250

20%

4,038

3.74

 

 

 

 

SOFTBANK Tech Vent

15687.825

500

20%

18,825

17.42

 

 

 

 

SOFTBANK US Ventures

50273.525

500

20%

60,328

55.84

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Softbank Businesses

3/09 EBITDA

 

Multiple

Value

Debt

 

 

 

 

Broadband

62997.7

 

6.0x

377,986

 

 

 

 

 

Fixed Line

31241.9

 

4.5x

140,589

 

 

 

 

 

Mobile

354340.5

 

5.0x

1,771,703

1,516,334

255,369

 

 

 

eCommerce

8391.7

 

6.5x

54,546

 

236.364844

 

 

 

Internet Culture

467.5

 

6.5x

3,039

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consol EV

2,347,862

 

 

 

 

 

 

 

 

Net Debt

2,247,702

 

 

 

 

 

 

 

 

Market Val

100,160

92.71

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Value/Shr

1836.99

-11.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stub Analysis

Price

Shares

Value

Per Share

 

 

 

 

 

Softbank

¥2,080

1,080

2,247,232

 

 

 

 

 

 

Yahoo Japan

¥52,300

24.9

1,304,771

¥1,208

 

 

 

 

 

Yahoo

¥2,908

52.3

151,933

¥141

 

 

 

 

 

Alibaba

¥162

1196.0

194,122

¥180

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Softbank Price ex Yahoo Japan

 

 

¥872

 

 

 

 

 

Softbank P ex YHOO and YHOO Jap

 

 

¥732

 

 

 

 

 

Softbank ex YHOO, YHOO JP, Alibaba

 

¥552

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Softbank Bus Consol EV

2,347,862

 

 

 

 

 

 

 

 

Total Softbank Net Debt

2,247,702

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Softbank Business Market Value

100,160

 

 

¥93

 

 

 

 

 

All Other Cos ex YHOO, YHOO JP, Alibaba

 

¥216

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stub Price Target

 

 

 

¥309

 

 

 

 

 

    Mispricing

 

 

 

-44.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Catalyst

Continual degradation of the business until subscriber growth begins to slow in late 2009/early 2010, resulting in exposure of true revenue and EBITDA from the service business rather than a combination of service and equipment revenue. Cash flow analysis from the sell side rather than just revenue and EBITDA.
    show   sort by    
      Back to top