SoftBank, the Japanese telecoms group that has evolved into the world’s biggest technology investor, this week posted a set of quarterly results that it will hope offer encouragement to potential investors in its new $108 billion Vision Fund 2. A 360% increase in net profit over its first quarter was recorded thanks to special gains realised on the 2016 sale of shares in Alibaba and increases in the ‘paper’ value of investments held through the original Vision Fund.
The other major development was the announcement that the company will no longer include results from Sprint, the U.S. mobile carrier it has owned a majority stake in since 2012. SoftBank is confident that a proposed merger with T-Mobile USA will go through by the time its next quarterly results are published. The deal has been held up by an antitrust lawsuit filed by more than a dozen states but has been approved by the Justice Department and the Committee on Foreign Investment in the U.S., as well as receiving support from Ajit Pai, the Federal Communications Commission chairman.
SoftBank CEO Masayoshi Son’s confidence the deal is secure enough to announce the accounting change was summed up by his assertion “there hasn’t been a case in history where you had those three approvals and the deal didn’t get done”.
Taking Sprint out of SoftBank’s accounts will be a boost on a number of levels. The telecom carries a significant debt burden of around $47 billion which will be removed from SoftBank’s balance sheet. That will also reduce SoftBank’s overall interest-bearing debt obligation by about 29%. It could also reduce the company’s annual interest bill by up to as much as 50%.
While Sprint’s debt is ‘non-recourse’ to the parent company, the change wouldn’t be expected to significantly change SoftBank’s credit rating, Son does believe it has been having a negative impact on the company’s valuation. He hopes taking Sprint off the books will change the perception of the company as a debt-saddled telecom to that of a high-growth tech investor. However, he was also keen to point out that despite the general consensus that the Sprint acquisition has been a failure, the terms of the T-Mobile merger will see the company realise a 21% rate of return on the deal – “not bad at all as an investment”.
58% of SoftGroup’s annual operating profit has been realised through the performance of investments held by the original Vision Fund. Indian hotel chain Oyo, professional messaging app company Slack, which recently IPO-d and U.S. food delivery app DoorDash contributed most to the positive profit figure, compensating for drops in the value of other investments. Uber’s share price drop since the ride-hailing app and driverless technology company’s May IPO has been the biggest negative.
But the overall value growth of the fund’s holdings, even if the profits are ‘on paper’ rather than cash flow, is a major positive. SoftBank and Son will hope the figures help crystalise the commitment of potential investors in Vision Fund 2. Microsoft, Apple, Foxconn, the Kazakhstan sovereign wealth fund and a host of Japanese banks and insurers have signed memorandums of understanding to invest in second edition of the technology fund, which is targeting a war chest of $108 billion. However, with these memorandums non-committal, the apparent health of the first Vision Fund should help get the new investments over the line.