Paul Singer earned his reputation as a take-no-prisoners brawler by challenging the interests of Argentina’s government and South Korea’s family businesses. With his latest investment, though, the American activist investor appears to be taking a more collaborative approach.
Singer’s Elliott Management Corp. took a stake of almost $3 billion in SoftBank Group Corp., saying the Japanese company’s shares are woefully undervalued compared with its assets. That’s exactly the argument SoftBank founder Masayoshi Son has been making for years.
Son is finding himself pleading the case more frequently after a series of stumbles in recent months. WeWork’s plan to go public imploded, forcing SoftBank to arrange a rescue financing of $9.5 billion in October. Uber Technologies Inc. continues to underperform. At least two managing partners of SoftBank’s $100 billion Vision Fund have left since December, and the company is struggling to secure investors for its second technology fund.
One part of the effort to convince the world it’s undervalued: SoftBank has taken to posting a daily calculation online of what its shares are worth compared with their price, based on its holdings in Alibaba Group Holding Ltd., Sprint Corp. and others. The company’s own sum-of-parts calculation puts its total value at ¥12,259 a share ($111). That’s more than double SoftBank’s actual share price, which values the company at about $96 billion. Elliott thinks SoftBank’s net asset value could be about $230 billion, people familiar with the discussions have said.
The New York-based hedge fund and SoftBank’s leadership have held cordial discussions, according to people familiar with the matter, perhaps because some of their interests are aligned. Indeed, news of Elliott’s stake popped SoftBank’s market value by more than $6 billion, and lifted the value of Son’s stock by more than $1 billion. The value of Elliott’s stake rose too, of course.
SoftBank may not go along with everything that Singer is seeking. But their interests may be more similar than they first appeared. As SoftBank prepares to report financial results on Wednesday, here’s a rundown of the issues.
Elliott wants SoftBank to buy back shares because of their discount, arguing it could spend as much as $20 billion by trimming investments in companies like Alibaba, Sprint and others. Son seems likely to accommodate at some point, though the amount may be much smaller. He has unveiled re-purchases with February earnings twice in the past — one for $5.5 billion last year and another for $4.4 billion in 2016.
“There was a pretty good chance of another share buyback in 2020, even before Elliott’s involvement,” said Atul Goyal, an analyst at Jefferies Group. “Given the persistent discount, it was only a matter of time before SoftBank got targeted by an activist.”
Alibaba shares surged 55 percent last year, far outstripping SoftBank’s 30 percent gain. The “decoupling” prompted Goyal to speculate that another buyback is imminent. Son has shown increasing willingness to part with stock in his most successful investment to date, including putting up $9.5 billion of Alibaba shares as collateral for margin loans under conditions that suggest he has no intention of getting them back, Goyal wrote in a report dated Dec. 9.
Diversity and oversight
Elliott isn’t seeking any board seats at SoftBank, but wants the company to boost independence and diversity on its board, the people said. At most, only two of the 11 directors are independent and all are male, they said. At the last earnings call in November, Son said he was committed to improving corporate governance. A person familiar with the matter said the company was currently seeking independent board members.
Elliott also wants SoftBank to set up a special committee to review the investment process at its $100 billion Vision Fund, which it thinks is a drag on the share price despite making up a small portion of the assets under management, the people said. Son isn’t likely to give up control; indeed, he is the only “key man” at the fund. But SoftBank recently approved new governance standards for its portfolio companies and investment guidelines, a step toward more accountability.
“A buyback is a near-term catalyst for the share price,” said Justin Tang, head of Asian research at United First Partners. “A more enduring catalyst in our view is increased Elliott involvement in SoftBank’s investment decision making and a restructuring of its debt, which is costing billions in interest payments.”
Elliott also wants greater transparency around the Vision Fund, which discloses the names of its investments but not the size of the stakes or the valuation at which they were made, the people said.
SoftBank itself had recognized the need for more oversight as early as 2018, when it tasked Chief Operating Officer Marcelo Claure with improving operations across portfolio companies. Claure, who led the Sprint turnaround, spent months assembling a team of about 40 executives. In the end, he was forced to cede control of the so-called SoftBank Operating Group to the man it was supposed to be overseeing — Rajeev Misra, the head of the Vision Fund.
“More disclosure on Vision Fund would be good, but in the end it comes down to trust and track record — listing the investments and getting independent valuations,” said Dan Baker, an analyst at Morningstar Investment Management Asia Ltd. “Any reduction in power and control for Son would likely be hard for him to swallow.”
The real boost to SoftBank’s shares would be if Elliott convinced Son to gradually wind down the Vision Fund altogether, Baker said. But there is little sign Son would go along. The billionaire seemed undeterred by the poor market reception to marquee investments. As recently as November, Son said he was still planning to raise another massive investment fund.
So far, few investors have signaled a willingness to go along. SoftBank heavily courted major backers of the first fund, including Saudi Arabia’s Public Investment Fund and Abu Dhabi’s Mubadala Investment Co. The receptions were cool, and SoftBank has said it would put $38 billion of its own capital into the second fund. The $108 billion target Son set for the fund, however, remains elusive.
Troubles with the Vision Fund have called Son’s management style into question. Employees alleged a pattern of harassment and recklessness in a Bloomberg Businessweek story published in December. SoftBank shareholders expect to learn more details about the Vision Fund’s performance when the company reports financial results on Wednesday.
“The interests of SoftBank and Elliott are aligned when it comes to wanting the shares price to rise,” said Mitsushige Akino, an executive officer at Ichiyoshi Asset Management Co. in Tokyo. “But Son’s management style is looking 10 to 20 years ahead. That’s where you may see tension.”