SoftBank – The domino effect

ERRATUM: Corrects previous version which incorrectly stated that SoftBank has $2.8bn in cash (Q4 19) when the correct figure is $35.9bn. 

SoftBank goes into cash conservation mode.

  • The dangers of financing growth with debt are coming home to roost as I suspect that the current rush for liquidity has caused SoftBank to move into cash conservation mode, explaining the real reason why it may pull out of the $3bn stock purchase of WeWork.
  • SoftBank has informed WeWork investors that it may back out of the previously agreed $3bn share purchase that was part of the company’s rescue after the catastrophic failure of its IPO.
  • SoftBank was originally due to complete the deal on April 1st after it received sign-off from anti-trust authorities but it is citing a regulatory investigation as the reason for its potential pull-out.
  • I find this reason very difficult to believe because:
    • First, time: The SEC has been investigating both the WeWork IPO and issue around its former executive Nikesh Arora for some considerable time.
    • These investigations came to light in November 2019 and July 2019 respectively.
    • The earlier one was in place long before SoftBank bailed out WeWork implying that if it was going to be a problem it would never have made the deal the way that it did.
    • Second, liquidity crunch: Global markets are teetering on the edge of a large liquidity crunch which governments and central banks are doing everything that they can to prevent.
    • SoftBank has approximately $132bn of debt on its balance sheet and $35.9bn in cash which are not the kind of figures one wants to have in a mad rush for liquidity.
  • Consequently, I think SoftBank is pulling out all the stops in order to conserve liquidity as almost everyone else is doing and paying Adam Neuman $970m in this environment may not go down very well with its investors.
  • The problem that SoftBank faces is the same as it is for any heavily indebted company which is the risk of the domino effect.
  • This is where share price declines (eg Alibaba) or an inability to roll-over debt causes a cash flow crunch which in turn causes covenants to be breached and debts to be called in and so on.
  • This would be a real problem as it would need to liquidate its entire holding in Alibaba (very difficult in this market) to cover its debt pile.
  • Hence, I suspect that all non-essential investment activities at SoftBank will cease for now while the company conserves as much cash so it can to rise out the current uncertainty.
  • It is likely to be a few months before any semblance of normality is resumed which I think also applies pretty much to all venture capital and private equity businesses.
  • The market remains un-investible with no rational reason for most of the moves being observed and so I am staying out.

RICHARD WINDSOR

Richard is founder, owner of research company, Radio Free Mobile. He has 16 years of experience working in sell side equity research. During his 11 year tenure at Nomura Securities, he focused on the equity coverage of the Global Technology sector.