TOKYO — SoftBank Group CEO Masayoshi Son said Wednesday he made a "poor" decision investing in U.S. office sharing company WeWork at a $47 billion valuation, which led to the worst financial performance in the company's history.
Son nevertheless defended the $100 billion Vision Fund’s track record and said SoftBank’s shareholder value was at a record high, in a bullish show of confidence in his group’s overall strategy.
"WeWork had a very big impact on the performance of Vision Fund and SoftBank," Son, 62, said in an earnings presentation in Tokyo as he strutted about on a stage backlit by charts and earnings projections. "I have a lot of reflection that my investment judgment was poor in many ways," he said.
SoftBank reported on Wednesday a larger than expected loss of 700 billion yen ($6.4 billion) for the July-September quarter due to investment write-downs at its Vision Fund portfolio of companies, which includes WeWork and Uber Technologies.
The dramatic swing from a 1.12 trillion yen profit the previous quarter -- the highest quarterly profit ever for a Japanese company -- is a major blow for Son and underlines the volatility of the Japanese conglomerate’s tech-focused investment strategy.
Son described the results as “disastrous” and said it was the “biggest quarterly loss since the start of our business.”
At the same time, Son said two numbers indicated that both SoftBank and the Vision Fund are doing extremely well: what he claimed to be a 1.4 trillion yen rise in shareholder value over the three-month period, and a 1.2 trillion yen overall profit for the Vision Fund, since it began investing in 2017. In the second quarter, it suffered a 970 billion yen loss.
“These are numbers that many people don't want to believe,” Son said. “But they are true.”
The presentation indicated how Son, who is facing serious questions over his support for WeWork, is attempting to shrug off naysayers as he doubles down on what he believes is an early bet to dominate the future of technology.
He applied similar logic to SoftBank’s $9.5 billion rescue package for WeWork in a deal that handed 80% of the company to the Japanese conglomerate. SoftBank and its Vision Fund had already committed over $10 billion in WeWork and related joint ventures.
Son went on to acknowledge that “WeWork’s losses are expanding at an extremely fast rate.” In addition, he said, turning around WeWork would be “easy”. “Time will solve the problem,” Son said. “That’s all.”
The key reason for WeWork’s mounting losses was that many of its buildings were new and had low occupancy rates, he said. Now, WeWork will sell off unprofitable ventures, stop taking out new leases and focus on buildings that are over 12 months old and which have higher margins.
“As a result, expenses will be halved," Son said. "Naturally, the break-even point will move forward, and the profit at the building level increases dramatically. The answer is simple,” he claimed.
Still, investors such as billionaire hedge fund manager Bill Ackman, believe there is a high probability that WeWork is worth zero.
The Vision Fund also suffered from declines in the valuations of more than 20 of its 88 companies. Son said, however, that many more had gained in value since the fund's inception and the net result was a 1.2 trillion yen paper profit.
The fund has an internal rate of return — a key measure of performance — “that is almost twice the world’s average,” Son said.
It is unclear how much his arguments will convince investors. SoftBank’s share price has dropped by nearly 30% over the past three months, widening its “conglomerate discount” — the difference between the shareholder value touted by Son and its enterprise value — to $130 billion.
Son said the first fund has “completed its investment phase” but declined to comment on the ongoing negotiations with investors for a second Vision Fund, which was announced in July.
“There is no change in policy,” Son said. “These are small ripples, not big waves. I reflect on it, but I am not dispirited.”
Additional reporting by Rurika Imahashi