SoftBank’s Alibaba stake both blessing and burden

February 27, 2014

By Una Galani

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

SoftBank’s investment in Alibaba must be one of the most successful of all time. Billionaire chief Masayoshi Son injected just $20 million into the Chinese e-commerce giant in 2000. Today, the 36.7 percent shareholding accounts for a large chunk of Japanese group’s market value. As Alibaba heads toward an initial public offering, however, Son’s investment blessing may become a burden.

The owner of online shopping sites Taobao and the Alipay electronic payment system is still a private company. Based on its limited financial disclosures, Breakingviews estimates it is worth around $113 billion. That values SoftBank’s stake at $41 billion, or 38 percent of the Japanese group’s total sum of the parts, according to a new Breakingviews calculator.

Calculator: How important is Alibaba to SoftBank?

Many of SoftBank’s other businesses are already listed. Its 80 percent stake in U.S. mobile carrier Sprint is currently valued at $26.5 billion. Softbank’s 42.5 percent shareholding in Yahoo Japan is worth $15.3 billion. Other stakes in mobile games maker GungHo, Supercell, and handset maker Brightstar add up to $7 billion, based on market values or recent purchase prices.

Then there’s SoftBank’s wholly-owned Japanese telecom business. Apply an industry multiple of 4.4 times EBITDA, strip out the remaining net debt, and the equity is worth $19.2 billion. Put it all together, and SoftBank’s parts add up to $109.5 billion.

But investors aren’t giving Son full credit for his empire, which is broadly focused on the internet. Though SoftBank shares have more than doubled in the past year they still trade 16 percent below the combined value of the company’s parts. Some discount is warranted: SoftBank can’t easily sell. However, investors also seem to be overlooking synergies: together, SoftBank’s Japanese and U.S. telecom operations are the world’s second-largest purchaser of network equipment.

The bigger question is Alibaba. Founder Jack Ma sits on Softbank’s board, but that’s where cooperation appears to stop. For now, the investment is a blessing: SoftBank is one of the few ways for public investors to gain exposure to Alibaba. But that advantage will disappear when Alibaba goes public. At that point, Son will have to justify tying up more than a third of his company’s value in a minority stake- or find a way to part with his most successful ever investment.

Calculator: What is Alibaba worth?

One comment

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Not sure I buy your conclusion, but a great analysis up to that point. While you are right of course that when Alibaba goes public, investors can simply go there. But surely that doesn’t mean that the valuation of Softbank, affected as it is by Alibaba, will decrease?
If anything, it should increase since the valuation will be straightforward.

As of now there are widely varying estimates of Alibaba’s value, including yours. That uncertainty will no longer be present once the IPO is filed. On top of that, there is a good chance that Alibaba shares will rocket up after listing, since interest in it as well as projections of its future value, are huge. All of this should allow Softbank to lessen that 16% conglomerate discount.

We shall see.

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