Update June 7. Softbank (SFTBY) continues to pay down debt. The Japan-based telecommunications and Internet venture capital investor plans to sell part of its stake in Alibaba (BABA) for $10 billion, and its shares in GungHo Online Entertainment, a Tokyo game developer, for $685 billion,and its position in Finnish game developer Supercell Oy for an estimated $3.5 billion.
The asset sales won’t turn Softbank into a AAA-credit by any means. (The company currently earns a credit rating from Standard & Poor’s and Moody’s Investors Service one notch below investment grade.) Softbank will still carry $110 billion in debt and its purchase of Sprint is still an albatross around the company’s neck. The money-losing mobile phone operator has recorded seven staight years of losses and has $10 billion in debt coming due in the next three years.
But the asset sales should help close the considerable gap between the market value of Softbank on June 6 of $68 billion and the value of the stakes it holds in public companies of $87 billion. And then, of course, there are the still private investments in Snapdeal, an Indian e-commerce site, Housing.com, ride-hailing service Ola, in the U.S. Social Finance, an online lender, and other Internet startups. The planned asset sales and debt reduction have already led to a rally to a three-year high in the company’s bonds due in 2020.
The asset sales also make room for new venture capital investments. (I added Softbank to my Jubak’s Picks portfolio on February 28,2015 because I think it is the best way to buy a piece of the next wave of Internet companies in Asia.) The company has told analysts that it has 20-30 investment targets under review and that it plans to invest $3 billion annually.
One of those investments was announced this week: Softbank and Alibaba have formed a cloud computing service company targeting Japanese customers. (Alibaba’s cloud revenue almost tripled to $153 million in the March quarter.) Softbank will own 60% of the cloud venture.
If the market simply valued Softbank’s shares, which closed today at $$28.49, at the value of its stake in public companies, the stock would be worth $36.44. At the current market price, in other words, you get all the private Internet investments for free. As of June 7 I’m keeping my target price for Softbank at $42 a share. The stock is up 13% year to date and down 3.72% since I added it to Jubak Picks.