Let's Go METS

SoftBank's Alibaba selldown is elegantly coded

SoftBank has found an elegant way to cash in some of its investment in Alibaba. The Japanese tech and telecom group has offloaded stock worth $10 billion in the Chinese e-commerce giant, yet ensured those shares won't hit the market anytime soon. The fiddly structure solves a particular set of problems for SoftBank.

When Chairman Masayoshi Son first invested $20 million in Alibaba in 2000, he could hardly have imagined the investment would balloon to $65 billion. Faced with rising debt, the Japanese group was under increasing pressure to take some money off the table. Yet any disposal faced several challenges.

First, SoftBank is not registered with the US Securities and Exchange Commission, so it could not offer Alibaba shares directly to public investors. Second, it wanted to raise multiple billions of dollars, but to avoid selling at a big discount.

SoftBank partly solved this problem through a series of off-market transactions. Alibaba itself bought back shares worth $2 billion, while the Chinese group's senior executives snapped up another $400 million. Singaporean sovereign wealth funds Temasek and GIC signed up for a further $1 billion.

However, SoftBank still needed to tap public investors. The solution was to sell securities in a trust which exchange into Alibaba shares after three years. In the meantime, investors in these "mandatory exchangeable trust securities" receive a 5.75 per cent annual coupon, with the trust's excess cash parked in government bonds.

The minimum price for the exchange is $76.69 - Alibaba's closing price on June 1. But if the stock rises, the trust scales back the number of shares that investors receive. This effectively ensures that SoftBank keeps the first 17.5 per cent of any upside.

Though SoftBank's trust was much larger than previous similar structures, it proved popular. From an initial target of $5 billion, underwriters swiftly scaled it up to $6.6 billion, lifting SoftBank's total proceeds to its target of $10 billion. The net gains from the sale will depend on how much tax SoftBank has to pay. Despite the convoluted structure, however, the selldown looks a stylish way of jumping over numerous hurdles.