SoftBank’s $100 bln VC dream requires creativity

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Masayoshi Son is nothing if not ambitious. The SoftBank chief executive has pledged to commit $25 billion over five years to a new technology fund which will have up to $100 billion to play with altogether. That’s a big sum for a company with a strained balance sheet. But Son still has ways to find cash at his tech group.

Less than three months after its $32 billion purchase of chipmaker ARM, SoftBank is working on the new investment vehicle with Saudi Arabia. The kingdom’s top sovereign wealth fund could chip in $45 billion, with SoftBank and other big investors making up the rest. Son said the fund will target “one or two” multi-billion-dollar acquisitions, the Financial Times reported on Tuesday.

Even for the $75 billion SoftBank, chipping in a quarter of the fund’s eye-catching total looks a stretch. The Japanese group expects its domestic telecom business to bring in 500 billion yen ($4.8 billion) in free cash flow for the year ending in March. But its loss-making U.S. subsidiary, Sprint, is still burning through cash. The mean of analysts’ estimates for SoftBank’s free cash flow in 2017 is only a little over $3 billion.

Son also pays out roughly $500 million in dividends annually. Barring an unlikely quick turnaround at Sprint, that means he’ll fall well short of having $5 billion a year to spare for the new fund, assuming his pledge is spread evenly over five years.

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Taking on more debt could be tricky. After buying ARM, the group’s consolidated net debt stands at 7.1 trillion yen, a chunky 4.4 times EBITDA. Then again, SoftBank in August floated the idea of selling $10 billion of hybrid bonds – debt-like securities that are treated more like equity. That could become one new source of funds.

Another could be the fees from running the fund on behalf of others. A 2 percent annual management fee on the other investors’ cash – perhaps a generous assumption – would bring in an additional $1.5 billion a year for SoftBank. And Son could also offload more assets, like the sale of part of SoftBank’s Alibaba stake and gaming companies Supercell and GungHo, which together raised about $17 billion.

Investors hoping for a disciplined focus on debt reduction at SoftBank are likely to be disappointed. Son still has a few creative options up his sleeve.

Source: Reuters 

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