February 12, 2020 / 11:26 AM / 15 days ago

Breakingviews - Accord is within reach for SoftBank and Elliott

Japan's SoftBank Group Corp Chief Executive Masayoshi Son attends a news conference in Tokyo, Japan, November 5, 2018.

LONDON (Reuters Breakingviews) - Masayoshi Son and Paul Singer see the world differently. The SoftBank boss touts a 300-year outlook, while the billionaire hedge fund impresario favours more immediate shareholder value. The results may ultimately be suboptimal, but the two men should be able to find common ground.

Singer’s Elliott Management has built a near-3% stake in the $108 billion technology conglomerate. Son seems ready to give ground on governance, stating alongside quarterly results on Wednesday that he’s keen to improve disclosure at the colossal Vision Fund. The next job is closing SoftBank’s valuation discount, which Son highlighted with a bizarre comparison to Wittgenstein’s famous duck-rabbit optical illusion. SoftBank claims a $228 billion net asset value, but its market value is 52% lower.

One answer is a breakup, by handing shareholders SoftBank’s stakes in Alibaba, Sprint and Arm. That’s unlikely: Son’s 22% stake means he can block investor motions advocating serious upheaval, which require a two-thirds majority to pass. Elliott is therefore pushing for the less radical step of trimming SoftBank’s large holdings and using the proceeds to buy back shares.

Son may be amenable. When he announced $5.5 billion of share repurchases last year, the valuation discount initially narrowed by 15 percentage points according to analyst Kirk Boodry, who publishes on Smartkarma. Liquidating $20 billion of SoftBank’s portfolio to buy back shares would boost net asset value per share by 12%. If SoftBank’s discount again narrowed by a similar amount as in the last buyback, the shares would be 47% higher, even after Wednesday’s rally following a U.S. judge’s approval of Sprint’s merger with T-Mobile US. Elliott’s return would be bigger, since it invested months ago when the price was lower. Son would also gain, as SoftBank’s largest shareholder.

Such an accord requires sacrifice on both sides. Elliott would surrender a bigger uplift from more radical SoftBank surgery. Buybacks also mean more debt. SoftBank’s loan-to-value ratio would creep closer to its 25% self-imposed ceiling during “normal” times. Son, meanwhile, would have less cash to back a sequel to his $100 billion Vision Fund, which was supposed to be financed partly through asset sales. In other words, it may be possible to reconcile two competing investment views of the world – but only at the cost of impairing both.


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