SoftBank Group is debating a new strategy to go private by gradually buying back outstanding shares until founder Masayoshi Son has a big enough stake he can squeeze out the remaining investors.
The approach would likely take more than a year and would mean the Japanese company continues to sell assets to fund successive buybacks, according to people familiar with the matter.
Mr Son would not buy more shares himself, but his ownership stake, now about 27 per cent, would increase as other investors sell stock. Under Japanese regulations, Mr Son could compel other shareholders to sell when he gets to 66 per cent ownership, perhaps without paying a premium, the people said.
One advantage of the plan, which insiders have called a “slow-motion” or “slow-burn” buyout, is that it gives SoftBank flexibility to purchase its own stock when it dips, according to the people. In the case of a formal buyout, it would have to pay a premium, likely of around 25 per cent. Shareholders are also likely to support buybacks, especially since the company continues to trade at a discount to the total value of its holdings in companies from Alibaba and Uber to DoorDash.
The billionaire said as recently as February he thought SoftBank was better off as a public company. More recently, he has declined to comment on his plans after reports about a possible buyout in publications, including Bloomberg News.
“If our shares drop down, I will buy back more shares more aggressively,” Mr Son said at a conference in November. SoftBank declined to comment for this story.
Shares rose as much as 6.7 per cent after Bloomberg’s report.
Mr Son has debated the idea of going private off and on for at least five years. Even with SoftBank’s market capitalisation at about $50 billion and its assets worth three times that, banks proved hard to convince. They offered unfavorable terms, torpedoing the talks, a person involved in the negotiations has said.
Instead, Mr Son unveiled plans to sell about $43bn in assets to pay down debt and buy back stock. By June, he had offloaded $13.7bn of Alibaba stock, an even larger chunk of its stake in T-Mobile US and some shares of SoftBank, his Japanese telecommunications unit. He then went even further, announcing the sale of Arm to Nvidia for about $40bn, slashing the stake in SoftBank by about a third and selling a controlling shareholding in phone-distribution company Brightstar.
Mr Son says he is now sitting on $80bn in cash. The robust initial public offering market has also given SoftBank some big gains on investments, including China’s KE Holdings and DoorDash.
SoftBank’s market value has surged however, with a rally of more than 160 per cent since its low in March. The value of the stock outside of his control is about $87bn.
SoftBank is not obligated to publicly disclose buyout plans, unless it takes concrete steps like setting up a special committee to review the bid or getting letters of intent from the banks for financing, according to one of the people familiar. The disclosure rules in Japan, where management buyouts are rare, have gray areas that would give SoftBank room to maneuver, the person said.
Mr Son may still do a traditional management buyout if the share price falls below a certain level, one of the people said, declining to give specific numbers. Elliott, SoftBank’s biggest external shareholder, would take part, provided the stock is still trading at a discount to its underlying value, according to a different person. The Japanese conglomerate is also less leveraged today and a much easier vehicle to lend to for the banks than it was in March, the person said.
After repurchasing 1.35 trillion yen ($12.95bn) of shares this year, SoftBank holds about 12 per cent of outstanding stock. Mr Son controls about 26.8 per cent through various entities. The company has already announced plans to buy back 1.5 trillion yen more through July of next year. At yesterday’s closing price, that would increase Son’s share to less than 35 per cent, a long way to go until a decisive majority.
Some analysts are skeptical Mr Son would pursue a buyout now given such challenges – and his propensity to use any cash he has for ambitious deals.
“Until this year, Son has shown little appetite for tackling the discount with buybacks,” said Atul Goyal, senior analyst at Jefferies. “Are we supposed to believe that he will now spend years and all of SoftBank’s cash on this scheme, instead of doing what he really loves – making big bets in the tech space?”
The problem with a slow-burn MBO strategy is that the buybacks are likely to raise the cost of the eventual deal, according to Mr Goyal. Even if Mr Son manages to raise his personal stake in the company to 66 per cent, Mr Goyal is not convinced he will be able to pull off the buyout without a challenge from minority shareholders.
Many inside SoftBank are also against the idea of going private. The sheer amount of cash required is one obstacle. Going private is also likely to cause blowback from credit-rating agencies, making the refinancing of billions of dollars in corporate bonds more difficult, one person said. A buyout would actually prevent Mr Son from doing big deals for as long as a year and a half, one factor giving him second thoughts, a different person said.
In February, when he addressed the idea of a buyout, Mr Son said he decided against pursuing a deal after giving it serious consideration. Keeping SoftBank public would allow shareholders to participate in the company’s growth and enforce management discipline, including transparency, he said at the time.