Masayoshi Son's SoftBank buyout would look more like Musk than Dell

Every quarter Masayoshi Son is forced to give metrics he doesn't believe capture the value of his firm. "We are an investment company, we're not engaged in operations," he said in August 2020

Masayoshi Son loves a dramatic deal. His next transaction could be the most riveting yet. 
 

The Japanese billionaire’s stake in SoftBank Group Corp. has crept up to more than a third, according to an analysis by Bloomberg News. While this has less to do with him buying additional shares and more with buybacks and cancellations reducing the total float, the effect is the same — concentrating control in the hands of SoftBank’s founder. That’s helped reignite rumors that Son is planning to take the $78 billion company private in what could be the world’s largest management buyout of all time.

It’s been clear for years that being public has lost some of the charm for Son. Every quarter he’s forced to give metrics he doesn’t believe capture the value of his firm. “We are an investment company, we’re not engaged in operations,” he said in August 2020, explaining the decision to stop reporting operating profit. “Net sales, net income, operating income don’t really make sense at all.” 

He’d rather investors focus on his two preferred metrics — net asset value and loan-to-value ratio. But the market’s been reluctant to follow his thinking, leading to a discount between SoftBank’s share price and its NAV (the value of its assets less its net debt). In recent months, Son appears to have given up trying to persuade them, announcing recently he’d step away from being the public face of the firm. He has also repeatedly declined to deny rumors about an MBO, offering a mere “no comment” when asked. 

Each year, the firm pays about $540 million in dividends to shareholders (though much ends up in Son’s pockets). Nowadays, it’s much easier to access cash outside of the public markets that bring the quarterly scrutiny and mockery that don’t help his cause. The top venture capital firms he now considers his peers, such as Tiger Global Management and Sequoia Capital, are private. 

Michael Dell’s 2013 $25 billion buyout of the company that bears his name is the textbook case study of take-private deals, and could be a model for the Japanese billionaire to follow. Faced with structural changes in the PC industry and complaints from activist investors, markets consistently undervalued the firm. So, Dell delisted the stock, renovating the business in private without the pressure of meeting quarterly expectations, in a move funded by private-equity firm Silver Lake, among others.

However, a SoftBank transaction might end up looking more like Elon Musk’s recent purchase of Twitter Inc. While not a company insider, the Tesla Inc. CEO had accumulated a 9% stake in the social-media firm by the time he announced his $47 billion bid. Debt helped Musk cover a big chunk of that figure, yet he was on the hook for $33.5 billion. Rather than cover it all himself, $7.1 billion came from a consortium of investors including Oracle Corp. founder Larry Ellison.

Son could use a similar strategy. He’s already heavily indebted for his personal portfolio, liable for about $4.7 billion owed to SoftBank for stakes including ones in Vision Fund 2 and a Latin American fund, neither of which he’s paid for. But despite the headline figure, the risks Son faces are minimal — he has no deadline to pay, instead pledging a token amount of SoftBank shares as collateral and paying an annual 3% fee that’s more than covered by the dividends he receives from SoftBank. 

He also has lots of rich friends who could help make that happen, including Alibaba Group Holding Ltd. founder (and reported recent Tokyo resident) Jack Ma, and Foxconn Technology Group founder Terry Gou. Vision Fund investors could also be invited to take part, particularly key stakeholder the Saudi Public Investment Fund. The first Vision Fund is committed to paying out 7% annually on an initial $40 billion of preferred equity, much of it held by Saudi Arabia and Abu Dhabi. While called equity, the cash commitment makes this function like debt.

One route to going private would be for Son to persuade them to help buy out SoftBank Group, roll their Vision Fund stakes into shares of the now-private entity, and at the same time relieve him of the burden of paying out preferred dividends. And they’re already familiar with the idea: Saudi Prince Alwaleed bin Talal Al Saud rolled over his $1.9 billion Twitter stake to remain a shareholder of the now-private company. 

Having gone private, not only would the dividends the group currently pays out to public shareholders go to Son and his partners, but the cash distributions from SoftBank Corp., the money-spinning Japanese telco it owns 40% of, would help cover any debt taken on to fund the buyout.

Another benefit would come from Arm Ltd., Son’s latest love affair. He’s under pressure to list it quickly to cover cash needs. Intel Corp.’s ill-advised listing of Mobileye Global Inc. in October serves as a warning — shares may be up since the debut, but Intel left a lot of cash on the table to make it happen. Going private would give him more time to build Arm into the firm he says could be a bet as successful as Alibaba, and list it at a moment of his convenience when the froth for tech IPOs reappears. 

An MBO would doubtless be not just expensive, but risky. For Son, who built his career on taking risks, that likely only makes it that much more attractive.