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SoftBank's bullish IPO backfires as bad news saps momentum

Shares of mobile unit fall 15% with Huawei and price war dampening outlook

Ken Miyauchi, president and CEO of SoftBank's mobile unit, speaks during a news conference in Tokyo on Dec. 19. (Photo by Toshiki Sasazu)

TOKYO -- The CEO of SoftBank Group's Japanese mobile unit on Wednesday acknowledged the "challenging conditions" facing the company after its shares fell nearly 15% on their first day of trading, leaving retail investors nursing losses.

Japanese investors flocked to buy into the world's largest IPO this year and the second biggest in history, which raised 2.6 trillion yen ($23 billion) for the group. Roughly 90% of the shares were allocated to domestic investors, the majority of which were sold to individuals.

Buyers hoping for an opening-day pop watched as shares sunk to a close of 1,282 yen, 14.5% below the offer price of 1,500 yen, raising concerns over the company's prospects.

One branch manager at a Japanese broker told Nikkei that he will embark on an apology tour to his clients, to whom he had so enthusiastically pitched the purchase. Virtually all of the investors who had taken part in the historic IPO lost money. 

The mobile unit's CEO, Ken Miyauchi, vowed to deliver both growth and shareholder returns, calling the listing a "new start" for the company.

"A lot of things happened ... but we had been planning [the IPO] and there was no need to withdraw," Miyauchi said, citing the controversy over its use of China's embattled Huawei Technologies as a supplier, the nationwide network disruption that hit less than two weeks before the listing, and rising price competition.

When SoftBank phones lost signals for four hours on Dec. 6 due to a software glitch, an estimated 10,000 to 20,000 users switched to other carriers out of frustration.

"I truly see a mountain of business opportunities," Miyauchi said. "We would rather focus our energy on that."

Nomura Securities and other lead underwriters wooed retail investors with the IPO's biggest selling point: a high dividend yield of 5% based on the offer price. But as the Japanese telecom market matures, sustaining these high payouts -- the bulk of which will go to the parent company -- may prove difficult.

A Japanese asset manager called the IPO price "too bullish." The company's price-earnings ratio at 1,500 yen per share comes to about 17 -- higher than Japanese rivals NTT Docomo and KDDI, which trade at 13 and 10 times forward earnings, respectively.

A Tokyo-area man in his 50s who bought into the IPO said he sold all his shares close to the offer price.

The listing was seen not just as a way to raise new capital for the mobile unit, but also for SoftBank Group CEO Masayoshi Son to boost the value of his company, which trades at a steep discount compared to the value of stakes in tech giants like Alibaba Group Holding. That failed to materialize on Wednesday, as shares of SoftBank Group fell 0.9%.

Miyauchi brushed off concerns among institutional investors about the mobile unit's underlying prospects. He laid out a strategy of moving beyond simply providing wireless service by rolling out new services in partnership with the technology companies in which SoftBank Group invests.

"The telecom business will grow steadily ... not massively, but steadily," he said. "By adding new businesses on top of that, we can achieve a large success."

The global market for communications services is only expected to grow 1.1% per year for the next five years through 2022, according to U.S. research company IDC. 

Net profit at the mobile unit, SoftBank Corp., has fallen for two straight years through the fiscal year ended in March 2018, but the company forecasts a 4.8% increase in its bottom line this year.

Meanwhile, chief technology officer Junichi Miyakawa addressed questions about the company's reliance on Huawei, which has been embroiled in the U.S.-China battle over trade and technology.

Miyakawa said the carrier was considering replacing Huawei equipment for its 4G network as well as unwinding its plans to work with the Chinese company on the upcoming 5G rollout. He said SoftBank wants to examine recent guidelines on suppliers issued by the Japanese government before making a decision.

Miyakawa said choosing another vendor for 5G would not have a significant impact, although the company may have to write off "tens of billions of yen" if it needs to replace existing Huawei equipment.

Japanese wireless carriers are also under pressure by the government to reduce prices and make subscription plans simpler. NTT Docomo, the market leader, plans to cut subscription prices by up to 40% in the April-June quarter. E-commerce group Rakuten, which is scheduled to enter the market in October as the country's fourth national carrier, is expected to intensify competition.

To seek growth outside the core telecom business, SoftBank has formed joint ventures with WeWork, the U.S. coworking company, and Chinese ride-hailing company Didi Chuxing in Japan. Miyauchi said Japan has become "the fast-growing [market]" for WeWork since it entered the country in February.

Skeptics say the initiatives will require upfront investment as well as time before they start generating profits.

"In the longer term, profit expansion will only occur if the ... JVs succeed," said Chris Lane, an analyst at Sanford C. Bernstein. "Given the current nascent nature of these companies, this remains a key risk."

SoftBank's mobile unit is also heavily leveraged. It had interest-bearing debt of 3.22 trillion yen as of March, compared with 1.1 trillion yen for KDDI and 163 billion yen for NTT Docomo.

Despite the fall on Wednesday, SoftBank mobile's market capitalization of 6.1 trillion yen comes close to that of larger rival KDDI. The company's ability to balance shareholder returns, growth and deleveraging will be the key to justifying the premium on the stock.

The SoftBank IPO was about three times larger than the second-biggest offering in Asia this year, a $7.5 billion sale by China Tower, according to Dealogic.

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