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SoftBank voices doubts over second Vision Fund

SoftBank Group Corp

SoftBank voices doubts over second Vision Fund

Geopolitical risk around Khashoggi affair exacerbates concern over Son strategy

Alarm over Crown Prince Mohammed bin Salman and the Khashoggi affair and concerns over the strategy adopted by Masayoshi Son, right, have hit Softbank © FT montage; Reuters; Bloomberg

SoftBank has voiced its doubts about the likelihood of a second $100bn Vision Fund for the first time, as investors fret that its plans could be disrupted by the intensifying furore surrounding Saudi Arabia.

Marcelo Claure, Softbank’s chief operating officer, said “there is no certainty” that SoftBank will launch another Vision Fund and added that no dates have been set.

Speaking at a technology conference in San Jose, Mr Claure added that SoftBank is “anxiously looking at what is happening” in Saudi Arabia after the kingdom became the subject of international criticism after the disappearance of the journalist Jamal Khashoggi.

“We like most parties in the world are looking at events unfold. Based on that, we will make decisions in the future, but at this point in time like most companies that have relationships with Saudi Arabia we are watching developments and see where this goes,” he said.

Asked if Vision Fund investments have ground to a halt, he tried to play down its significance to SoftBank. “We have assets under management in excess of $420bn. The Vision Fund is important for our business but it is not all of Softbank. We continue to operate other businesses.”

SoftBank’s share price on Wednesday was down 11 per cent from its level on October 5, as the broader market sell-off combined with worries from investors about its strategy and its proposal to spin off its mobile telecoms business.

The current share price does not reflect any belief there will be a second Vision Fund, said a portfolio manager at one of SoftBank’s top 20 investors. “The market has not priced in a Vision Fund II.”

In the months ahead of the disappearance of Mr Khashoggi, shares in SoftBank had surged as investors began to buy into Masayoshi Son’s vision of the future — ambitions that were underpinned by huge technology bets made through the world’s largest investment fund created with $45bn from Saudi Arabia.

Boasting strong returns from the first Vision Fund launched last year, SoftBank’s billionaire chief executive had confidently suggested that “Vision Fund II” was on its way with fresh Saudi backing.

That plan now looks precarious and analysts warned the fallout may expose a potential vulnerability in Mr Son’s strategy that hinges on the success of SoftBank’s equity investments to offset about $130bn in debt sitting on its balance sheet.

“If SoftBank cannot raise money in the next round of fundraising due to the geopolitical risk in Saudi Arabia, it would impact its growth strategy,” said Mana Nakazora, chief credit analyst at BNP Paribas Securities in Tokyo.

As a growing number of tech executives begin to distance themselves from Saudi Arabia’s business ventures following Mr Khashoggi’s disappearance, one risk is that companies would stop accepting funding from the Saudi-backed Vision Fund. A bigger risk is if other investors in the existing Vision Fund shy away from the second fund.

If SoftBank cannot raise money in the next round of fundraising due to the geopolitical risk in Saudi Arabia, it would impact its growth strategy

Mana Nakazora, BNP Paribas Securities

There is no evidence yet that companies are starting to reject offers from the Vision Fund and SoftBank appears committed to its Saudi partnership. “We are married to the Saudis,” a person close to SoftBank said last week. 

But speculation over SoftBank’s strategy has also intensified ahead of the group’s preparations for what analysts describe as a “philosophical shift” in its business model as it prepares to list the company’s cash generative mobile telecoms business.

“Frustration with the market valuation of SoftBank is a part of the motive for the initial public offering — but there is also a philosophical shift behind it,” said Nathan Ramler, an independent telecoms analyst writing on the SmartKarma platform.

SoftBank’s plans for the telecoms IPO, for which it has appointed Goldman Sachs and Nomura as lead underwriters and hopes to complete by the end of December, stand out against a worldwide background of cancelled listings. 

As well as doubting the underlying logic of spinning out the cash-generative mobile business, investors have questioned the apparent urgency behind the IPO. 

One Tokyo-based asset manager said that the share offering, which is likely to primarily target individual Japanese investors, looked increasingly like financial engineering by a chief who believes he is “more right than the market” and that his company’s share price should be much higher. 

Mr Son has argued that the partial sale of its SoftBank’s mobile business would help to unlock the value of the company’s assets, which he says suffer from a conglomerate discount.

Others say the urgency to spin off the telecoms unit does not necessarily reflect a desperation to raise cash but simply the reality that Mr Son now spends almost his entire time on finding the next investment targets for the Vision Fund.

“I seriously doubt Son spends much time, if [any] at all, on the telecoms business. If he is more focused on investing in new businesses and the internet, what’s the point of holding on to it for too long?” said Daniel Baker, an analyst at Morningstar. 

But, as analysts point out, SoftBank’s shift also appears highly dependent on the money Saudi Arabia has already invested and more that was expected to be sunk into future Vision funds.

“If the concerns are enough to put off their plans for a Vision Fund II, there will be serious questions about the existing fund as well,” said Mr Baker. “It would be better if they can prove the performance of the first fund before going to the next one.”

In addition to the Saudi-related concerns, a sell-off of SoftBank shares has been sparked by weakness in some of its invested companies, notably US chipmaker Nvidia and Chinese ecommerce group Alibaba.

“SoftBank’s strength is the paper gains on its stock holdings that can be used to offload the debt on its balance sheet,” Ms Nakazora said. “But if the geopolitical risk in Saudi Arabia leads to a risk-off sentiment and drags down the equity market, there is a serious risk of a wipe off in these paper gains.”

Additional reporting by Arash Massoudi

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