Business / Corporate

Son's $51 billion acquisition run faces speed bump


Billionaire Masayoshi Son’s 300-year business plan for SoftBank Corp. sees no pause in acquisitions that saw him splurge $51 billion in five years. Higher interest rates in the U.S. and Japan may put the brakes on his debt-fueled ambitions.

SoftBank is Japan’s biggest corporate bond issuer for the second year, raising ¥1.52 trillion to fund purchases including U.S. wireless carrier Sprint Corp. and game maker Supercell Oy. The company paid ¥271.5 billion in interest last fiscal year, more than it made in the past three quarters, according to its earnings data.

Son will have to balance future purchases with the increasing cost of servicing SoftBank’s record ¥9.4 trillion debt pile, as the U.S. Federal Reserve ends its bond buying program this month and analysts surveyed by Bloomberg expect Japan’s benchmark yield to almost double by the end of 2015.

The second-richest man in Japan has a business plan through the 24th century that calls for investments in 5,000 companies by 2040.

“Whether interest bearing debt becomes a problem for SoftBank depends on where Son takes his expansion-through-acquisitions strategy,” said Yusuke Ueda, a Tokyo-based credit analyst at Bank of America Merrill Lynch. “SoftBank will be exposed to serious interest rate risk if Son doesn’t rein in his M&A appetite.”

Japan’s 10-year benchmark bonds yielded 0.475 percent Friday, down 26 basis points this year and the lowest globally after Switzerland. The equivalent U.S. Treasuries yielded 2.15 percent. A basis point is 0.01 percentage point.

The respective yields in Japan and U.S. will probably climb to 0.87 percent and 3.4 percent by the end of next year, according to the forecasts of analysts surveyed by Bloomberg. Traders see a 59 percent chance the Fed will raise interest rates by December 2015, Fed funds futures data compiled by Bloomberg show. The central bank has kept its target rate in a range of zero to 0.25 percent since December 2008.

U.S. economic growth will probably accelerate to 3 percent next year from 2.2 percent in 2014, according to economic forecasts compiled by Bloomberg. That compares with an increase to 1.2 percent from 1 percent for Japan.

“There is no question that Son got a big leg up from low interest rates,” said Kazuyoshi Komiya, president of Komiya Consultants Co. “SoftBank, which has a lot of interest-bearing debt, will now have to deal with the prospects of U.S. ending the low-rate regime and yields creeping up in Japan. I wouldn’t be surprised if their interest expenses doubled.”

SoftBank’s proportion of net interest-bearing debt to earnings before interest, taxes, depreciation and amortization climbed to 3.1 times as of June, from 1.8 a year earlier. That’s still half the 6.2 times in 2006 after the company bought the Japanese unit of Vodafone Group PLC.

“We have already shifted to fixed rates for 70 percent of our borrowings,” said Hiroe Kotera, a Tokyo-based spokeswoman for SoftBank. “If the interest rates suddenly jump, we can respond by increasing the proportion of fixed borrowing and extending maturities.”

The Vodafone acquisition saddled SoftBank with ¥1.37 trillion of loans, equivalent to $12 billion at the time. It also transformed the company, founded by Son in 1981 as a wholesaler of packaged computer software, from an Internet and fixed-line provider into Japan’s third-largest wireless carrier.

Son’s $20 million bet 14 years ago on Alibaba Group Holding Ltd. has paid off as the then-unknown Web portal connecting Chinese manufacturers with overseas buyers evolved into China’s biggest Internet shopping mall. SoftBank estimates its 32 percent stake is now worth about $68 billion.

“This is a company that follows a high risk-high return strategy, but SoftBank also hedges its risks,” said Shigeru Nishiyama, a professor at Waseda Business School. “They borrow to invest and achieve huge success when things go well. And their domestic operations and profits from Alibaba’s IPO will serve as a support structure if things go sour.”

SoftBank issued a forecast in August that sales for the year to next March will jump 20 percent to ¥8 trillion, generating ¥1 trillion in operating income. That compares with the ¥750 billion and ¥730 billion profit targets for NTT Docomo Inc. and KDDI Corp., SoftBank’s larger rivals.

The cost to insure SoftBank’s bonds against nonpayment has dropped to 165 basis points, from as high as 2,412 in 2009, according to data provider CMA. It is still the third-riskiest company on the Markit iTraxx Japan credit-default swap index after Tokyo Electric Power Co. and Sony Corp.

SoftBank’s technology empire spans investments in more than 1,300 companies, including stakes in Legendary Entertainment, the producer of “Godzilla,” and Fitbit Inc., which makes wristbands that track exercise and sleep habits. Among Son’s more eclectic holdings are Cheezburger Network, a collection of humor websites, and Buzzfeed Inc., an online compiler of quirky lists.

“Son’s recent investments into gaming companies and a movie studio don’t offer prospects for mid- to long-term stability,” Bank of America Merrill Lynch’s Ueda said. “Investing within limits allowed by cash flow would trim annual purchases to about ¥300 billion and require getting interest-bearing debt under control.”

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