SoftBank – The family silver.

The sharing economy is in meltdown. 

• I think that it is extremely unlikely that SoftBank will become insolvent but a continued decline in confidence in its business model and potential further failures within its portfolio could trigger a serious liquidity crisis.
• The bankruptcy of OneWeb combined with the news that WeWork burned through $1.4bn in cash in Q4 2019 adds further to the storm that is battering SoftBank.
• SoftBank has a lot of investments that are in a very poor position to deal with the current climate as many are bets on the sharing economy.
• Companies like Uber, WeWork, OyO, Grab, DiDi and so on all rely on the willingness of users to share assets with other people rather than buy their own.
• Unfortunately, the Covid-19 pandemic means that humans need to stay as far away from each other as possible meaning that no one wants to share any assets with anyone else.
• This has also extended into food delivery which I had expected to fare much better than it is in this environment.
• Many restaurants have closed their doors completely as the cost of maintaining a big kitchen has proved to be too great to be supported by just a takeaway business.
• Furthermore, most restaurants make almost all their money on drinks which are no longer being supplied badly damaging the rationale to stay open.
• This combined with extreme caution by consumers and a surge in home cooking has led to a substantial decline in delivery volumes in the UK.
• The rest of the shared economy is faring as bad or far worse.
• This is a perfect storm for SoftBank which was already under colossal pressure following its disastrous attempt to list WeWork at a valuation of $47bn.
• Many of its other assets are creaking at the seams and many may require further cash injections to stay afloat.
• This is absolutely the last thing that SoftBank needs as it has $132bn of debt on its balance sheet and has just committed to raising $41bn in cash through the sale of assets including $14bn of its holding in Alibaba.
• SoftBank’s holding in Alibaba is by far its most valuable asset (the family silver) and if sold, the proceeds would more than cover its entire debt pile.
• This is why I think it is extremely unlikely that SoftBank will become insolvent, but raising cash in this environment is very difficult.
• The usual rules of public markets have completely broken down largely as a result of everyone wanting to hoard US dollars as much as US and UK consumers want to hoard toilet roll.
• This means that it could take SoftBank a long time to raise the $41bn raising the possibility of a cash crunch.
• This is especially the case as many of its holdings may need large cash injections to see them through the current crisis or face OneWeb’s fate.
• To be fair, SoftBank has been known to be a bit sceptical with regard to OneWeb’s outlook for some time, explaining its reticence to put more money in which led directly to its chapter 11 filing.
• Selling $41bn of assets in this environment means that SoftBank will have to give a lot of value away to raise the money but it is faced with little choice.
• I think that at some point, there will be a great opportunity in SoftBank, but as news of the difficulties that many of its portfolio companies are suffering filters out, I think that sentiment will sour further.
• I would like to see better visibility on this before thinking of making a value-based investment in SoftBank.