SoftBank Group is accelerating its pace of asset sales, highlighting the urgent need to raise cash as it strives to outlast a prolonged “tech winter.”
The Japanese investment group is effectively selling about 38% of shares it owns in Alibaba Group Holding—worth about USD 22 billion based on the Chinese e-commerce company’s stock price on Tuesday in New York trading—reducing ties to its most successful investment.
SoftBank has signed prepaid forward contracts, which are agreements with financial institutions to sell Alibaba stock at a later date, in exchange for an immediate cash payment at a discount to its current price.
In a news release on Wednesday, SoftBank said it will settle contracts that cover up to 242 million American depositary receipts between mid-August and September, resulting in its stake falling to 14.6% from 23.7% in June.
“By settling these contracts early, SoftBank will be able to eliminate concerns about future cash outflows,” it said. “These will further strengthen our defense against the severe market environment.”
Thanks to gains from the revaluation of its Alibaba stake and related derivatives, SoftBank said it expects to book a 4.6 trillion yen (USD 34 billion) profit in the July-to-September quarter, as contribution to income before income tax.
However, Alibaba shares have fallen 35% from their January peak this year, as investors fret over the company’s growth prospects and risk of being delisted in New York.
“It’s a surprise that SoftBank continues to sell Alibaba at such a level,” said Mike Leung, an investment manager with Hong Kong’s Wocom Securities. “This may indicate a dimmer-than-expected outlook for the company. I am more concerned about whether SoftBank will further reduce its holdings in Alibaba. [There will be] more pressure on Alibaba’s stock price if SoftBank intends to liquidate all its holdings eventually.”
The sale is part of an renewed effort to raise cash by SoftBank, which reported a record net loss of 3.16 trillion yen for the April-to-June quarter due to investment losses in its portfolio of tech stocks.
SoftBank’s near-USD 100 billion Vision Fund by early August had sold its entire USD 7.7 billion stake in U.S. ride-hailing company Uber Technologies, according to a company presentation. Also, the second USD 56 billion Vision Fund by the end of June had sold its entire USD 1.35 billion stake in Chinese property company Ke Holdings.
The exits, which came amid a downturn in the global stock market, highlight SoftBank’s ability to generate returns from its portfolio of technology stocks. They also signal a willingness by Masayoshi Son, the company’s billionaire chairman and CEO, to sell assets at a discount, potentially adding downward pressure on the shares of companies that received its investment.
“SoftBank will do/sell anything to protect its own shareholders,” including Son, Jefferies analyst Atul Goyal wrote in a research note. “SoftBank is willing to monetize any asset at a reasonable price. It is a good sign for SoftBank shareholders, though it does not bode well for SoftBank/Vision Fund investee companies.”
In a news conference on Monday, Son said he will undertake “significant cost reductions” at the Vision Fund, including layoffs, and become more selective in making new investments. SoftBank shares fell 7% on Tuesday.
Even after hitting the brakes on new investments, SoftBank needs cash to keep operating. In 2022, it has 1.5 trillion yen worth of debt repayments, 250 billion to 300 billion yen in interest payments, operating expenses and taxes, 70 billion to 80 billion yen in dividend payments, and 380 billion yen in investment commitments, according to a March report by credit rating agency S&P Global. S&P noted that SoftBank had “ample” liquidity.
Son said SoftBank is in talks to sell U.S. investment company Fortress Investment Group, which it bought in 2017 for USD 3.3 billion. It is also steadily reducing its stake in China’s Alibaba Group Holding, making deals to raise cash by pledging Alibaba shares as collateral and later settling those contracts by handing over the shares. Preparations are underway to sell shares in U.K. semiconductor design company Arm in an initial public offering.
The two Vision Funds’ portfolio of publicly traded stocks is another pool of assets up for sale. SoftBank sold USD 2.6 billion worth of shares from the two funds in the April-June quarter, according to its financial statement.
The Vision Funds sold their stake in Uber and Ke Holdings in several stages. In total, they generated USD 11.7 billion from the sales of the companies’ shares, netting a profit of USD 2.7 billion. By early August, the first Vision Fund also sold its stake in real estate company Opendoor.
Some portfolio companies, such as South Korea’s Coupang, Indonesia’s GoTo and India’s Delhivery, are trading at a premium to SoftBank’s purchase price.
But the market downturn is making it harder for SoftBank to generate big returns. Redex Research analyst Kirk Boodry, who publishes on Smartkarma, estimated that in the April-June quarter, the Uber shares were sold at a 16% discount to their purchase price.