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SoftBank's mobile IPO marks Son's latest risky play

Listing expected to raise $23bn but analysts question the timing

The Tokyo Stock Exchange looks set to approve SoftBank Corp.'s IPO after determining it to be sufficiently independent from its parent.
The Tokyo Stock Exchange approved SoftBank Corp.'s IPO on Monday   © Reuters

TOKYO -- SoftBank Group has set the stage for what is likely to be one of the largest initial public offerings ever, with its move to float mobile phone unit SoftBank Corp. But as Chairman and CEO Masayoshi Son completes the conglomerate's divergence into an investing holding company and a wireless provider, market watchers see significant risks on both fronts.

The IPO, approved by the Tokyo Stock Exchange on Monday and scheduled for Dec. 19, is expected to raise up to 2.64 trillion yen ($23 billion). SoftBank Group will sell as much as 36.8% of its holdings in its mobile arm, including an overallotment of shares if demand is strong.

Underwriters have set an estimated share price of 1,500 yen based on comparisons with peers and other factors, but the actual price may differ depending on investor demand ahead of the planned listing.

Japan's largest IPO to date was NTT Mobile Communications Network, now known as NTT Docomo, which raised 2.12 trillion yen in 1998, according to Dealogic. Alibaba Group Holding's $25 billion IPO in 2014 stands as the world's largest.

A 1,500 yen IPO price would give SoftBank Corp. a market capitalization of roughly 7.17 trillion yen. This would put it among Japan's 10 most valuable listed companies and ahead of rival KDDI, but behind Docomo.

SoftBank is expected to use the proceeds to contribute to investments by its Vision Fund and help repay interest-bearing debt.

Son has been focusing on transforming the group into an investment holding company targeting technology companies around the world. The centerpiece is the $100 billion SoftBank Vision Fund, announced in 2016 with major support from a Saudi Arabian sovereign wealth fund.

The Vision Fund -- which had agreed to investments in 38 companies as of September, including U.S. chipmaker Nvidia, workplace messaging app Slack and Indian budget hotel startup Oyo -- has been one of the group's best-performing operations since its launch. It accounted for around half of SoftBank's six-month operating profit of 1.42 trillion yen this year.

But there is a darker side to the story. SoftBank Group's interest-bearing debt reached nearly 18 trillion yen as of the end of September. For the fiscal year ended in March, it shelled out 510 billion yen on interest alone. Credit-rating agencies have assigned the company speculative grades.

While SoftBank Group has attracted funds amid historically low interest rates, the company's interest burden is set to swell as rates head higher. In addition, digital investments are notoriously volatile. In fiscal 2016, the group logged a valuation loss of 160 billion yen after the corporate value of two startup subsidiaries in India declined.

Saudi Arabia's deep involvement in the Vision Fund raises other questions. The kingdom has been taking heat over the killing of a Saudi journalist, creating not only uncertainty but also an image problem for SoftBank.

The mobile business, meanwhile, faces different headwinds.

Docomo recently announced plans to cut mobile subscription fees by up to 40% amid government pressure to lower prices, triggering a sell-off in Japan's top three telecom stocks. Son has indicated that SoftBank may take similar measures. And e-commerce giant Rakuten is planning to enter the market in the fall of 2019.

"The timing of the listing is not good," said a broker who asked not to be named. "It is obvious that mobile companies will face competition next year. The stock price will be volatile with individual day traders looking to buy and sell quickly and make money fast."

Under these conditions, SoftBank looks unlikely to remain as profitable as it has been in the past. The group said on Monday that consolidated net profit in the mobile unit is expected to grow 5% to 420 billion yen this fiscal year. "That's not enough to market it as a growth stock," a broker said.

SoftBank Corp.'s expected market capitalization pales in comparison with major U.S. telecom companies, such as AT&T and Verizon Wireless. They have market values of more than 20 trillion yen.

"While Japanese telecom companies have indulged in the stable domestic market, big U.S. and European companies have been improving their profitability much faster," said an official at a foreign asset management company.

But it is likely to gain appeal as a dividend stock. The carrier will aim to return about 85% of profits to shareholders, and it expects to pay an annual dividend of 37.5 yen per share this fiscal year. This equates to a dividend yield of 5%, better than the 4%-plus of Docomo and KDDI.

The SoftBank IPO is heavily focused on Japanese retail investors. "It is quite risky for foreign investors, amid all the uncertainties," said Kazumi Tanaka, an IPO analyst at Tokyo-based DZH Financial Research. "Meanwhile, SoftBank is very popular among Japanese individuals, and they have a lot of money. So it is not impossible to manage."

Some worry about the impact of such a massive offering on the stock market. The IPO could set off a wave of selling as individuals who lost money from last month's market plunge unload other shares to fund purchases of SoftBank Corp. stock.

"If SoftBank Corp. shares drop after the offering and leave investors with paper losses, trading by retail investors will slow further," said Tetsuro Ii, head of Commons Asset Management in Tokyo.

Even after the IPO, SoftBank Group will still control more than 60% of the mobile unit. The Tokyo Stock Exchange has no rules against one listed company owning another, but it says such arrangements are "not desirable," as the parent could advance its own interests at the expense of the subsidiary's minority shareholders.

If SoftBank Group drains too much cash from its mobile arm via dividends, the carrier may not have the resources to make investments in areas such as 5G service that will be essential to remaining competitive.

SoftBank must take steps "that, from investors' point of view, encourage growth at SoftBank Corp. in line with shareholders' expectations," said Masahiko Ishino, senior analyst at the Tokai Tokyo Research Institute.

At a recent news conference, Son unveiled plans to cut around 40% of the workforce in the mobile unit, and move personnel into businesses related to new technologies such as artificial intelligence and the "internet of things."

"We need to make our expenses and operations efficient to continue affordable services," he said.

Nikkei staff writers Minoru Satake and Ryo Igawa contributed to this report.

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