SoftBank – The family silver pt. II

Timing of a vaccine is critical.

• With the departure of Jack Ma and the completion of the Sprint, T-Mobile merger, SoftBank will sell down its core assets to cover a thumping $18bn write down in the Vision Fund, reduce debt and keep skittish investors onside by returning around $20bn to them in the form of share buybacks.
• Against the pandemic backdrop, the timing of a vaccine is crucial as the longer a viable solution to SARS-Cov2 takes to be developed, the more its asset sharing assets will lose in value.
• Outside of its investment portfolio, SoftBank reported reasonable FY 2019 results and outlook given the current situation but this is not where its problems lie.
• Its real problems lie in the Vision Fund, its large debt pile and waning confidence of investors some of whom may now see Masayoshi Son as a liability rather than an asset.
• The Vision Fund has taken a massive $18bn write-down to account for the lower value of 47 of its portfolio companies following recent events.
• The Vision Fund was already in serious trouble before the pandemic, but the global health crisis has made the situation significantly worse.
• This is because the Vision Fund went all-in on the asset sharing industry at very high valuations and at the moment no one wants to share any assets with anyone else for fear of infection.
• This means that many of SoftBank’s highest-profile investments are currently generating a tiny fraction of the revenue that they were before meaning that they are burning even more cash.
• This is why the issue of a vaccine against SARS-Cov2 is so crucial.
• As long as there is no vaccine, no one will want to share assets and SoftBank’s portfolio will continue to burn cash and lose more value.
• I think that a vaccine will not be developed in commercial volumes much before the end of 2021, and I am not convinced that a number of SoftBank’s assets will last that long.
• Top of the list is WeWork, whose business model was demonstrably flawed from the moment it was made public (see here) the value of which is now carried at just $2.9bn, down another 63% in three months and 94% from its mooted IPO price in 2019.
• Even Mr Son has admitted that he was “foolish” to invest in this company and appeared to let the stress get to him during the conference call daring one analyst to value the Vision Fund at zero. (see here).
• Hence, while I think that the worst is over for the Vision Fund in terms of big write-downs, there are probably smaller write-downs to come.
• This is because an effective vaccine is going to take time meaning more cash burned and value eroded while the asset sharing industry remains furloughed.
• The good news is that Mr Son’s greatest triumph (Alibaba) is still worth far more ($150bn) than the sum of his losses meaning that Softbank is nowhere near being in any sort of trouble.
• However, Mr Son’s reputation as a shrewd investor has been irrevocably tarnished and the investment process at the Vision Fund has demonstrable shortcomings.
• The net result is that there is going to a be a lot of scrutiny of its investment process as well as its approach to investing in companies in terms of the amount of money that gets put in.
• The days of high valuation and of SoftBank pumping far more money than the company needs are clearly over.
• This will lead to SoftBank migrating its practices to be more in line with the tried and tested methods used by almost everyone else.
• This will have a normalising effect on VC investing with much greater emphasis being placed on fundamental valuation rather than sentiment.
• In the short-term, SoftBank is also likely to have to support its portfolio and so I see the possibility that it will be forced to sell more assets and give more value away.
• I think that at some point, there will be a great opportunity in SoftBank, but as more news of the difficulties that many of its portfolio companies are suffering filters out, I think that sentiment may sour further.
• I would like to see better visibility on this before thinking of making a value-based investment in SoftBank.