Japanese telecommunications giant and VC firm, SoftBank Group(SBG) Corp, announced that it had approved a series of 'capital raising transactions' that involves selling shares in Chinese e-commerce company Alibaba Group Holding Ltd worth at least $7.9 billion. These shares are held by SBG’s wholly-owned subsidiary SB China.
SoftBank considers this move to be consistent with the company’s disciplined 'SoftBank 2.0 Capital Structure Management' strategy. As a result of this, SoftBank's Alibaba stake will fall to about 28 percent from the earlier 32.2 percent, but it will still remain the largest stockholder and close strategic partner.
SoftBank had begun investing in Alibaba Group in 2000 and eventually became the largest shareholder in the company. Over the years, the two companies have built a close relationship through business partnerships, joint ventures, joint investments and other collaborations. SoftBank said that it continues to be committed to its partnership with Alibaba, and the transactions are driven purely by SBG’s capital structure and deleveraging objectives. The transaction consist of three main aspects -
(i) Sale of Alibaba ordinary shares worth $2 billion to Alibaba.
(ii) Sale of Alibaba ordinary shares worth $400 million to members of the Alibaba Partnership acting collectively, and the sale of Alibaba ordinary shares worth $500 million to an unidentified major sovereign wealth fund.
(iii) An offering by a new SoftBank-controlled 'mandatory exchangeable' trust of $5 billion to $6 billion in securities that convert in three years into Alibaba stock. (More details here)
In connection with the transactions, SBG will also enter into a lockup agreement with Alibaba under which it has agreed not to transfer any Alibaba shares held by it for a period of six months, subject to certain exceptions.
SBG plans to use the proceeds of the transactions for the repayment of interest-bearing debt as well as other general corporate purposes, to increase its liquidity cushion. SBG also expects that its Alibaba shares will continue to be a core shareholding of SBG and it intends to maintain its strong relationship with Alibaba. But shares of Alibaba fell 2.8 percent in extended trading on Tuesday after the announcement as reported by Reuters. Stifel analyst Scott Devitt in a note to Reuters said that he maintained a "buy" rating on Alibaba after the SoftBank sale.
We do not view this as a shift in confidence from a major investor. In fact, it could remove an overhang of expectation of such an event."
SBG’s Chairman and CEO, Masayoshi Son, will remain a board director of Alibaba, and Alibaba’s Executive Chairman, Jack Ma, will remain a board director of SBG. Masayoshi Son said,
When I first met Jack Ma, I knew immediately he had the vision and passion to build the world’s leading e-commerce company, and I was very happy to invest alongside him to help him realise his ambition. This investment has been phenomenally successful and, over the past 16 years, we have built a close relationship, working together on many exciting projects. In that time, we have not sold any Alibaba shares. There are huge opportunities ahead for Alibaba and SBG looks forward to the continued partnership.
SoftBank has recently faced heat as its Sprint Corp acquisition went from bad to worse and some of its bets in India too didn't taken off as expected. Also Nikesh Arora, the company’s second in command, recently faced harsh questions from unnamed SoftBank investors regarding his investment decisions and high pay. According to reports, Nikesh Arora was paid $73 million for the last financial year. In recent interviews Masayoshi Son has said that he sees India as a high growth market and sees SBG's investments in the Indian startup ecosystem reaching $10 billion in the next 5-10 years.
While this most recent move by SBG may look like a step backwards, its worth noting that in its 34-year lifespan the SoftBank Group has gone through multiple highs and lows. The Economist notes that as an internet conglomerate SBG had invested in multiple web firms, including Yahoo. While the 2000 dotcom crash wiped out much of the value accumulated, Masayoshi Son invested $20 million in Alibaba. During the Chinese e-commerce giant's 2014 IPO, SoftBank's stake was worth more than $50 billion. Similarly he was also able to turnaround the Japanese operations of his Vodafone investment and make SoftBank Mobile into Japan's most profitable firm.
So it will be interesting to see how this 'liquidity cushion' will help SoftBank better its financial standing and also make bold bets globally and in India.
Related read: 14 nuggets of wisdom from Masayoshi Son