Business / Corporate

Softbank’s $23 billion buyback plan nudges investors to overlook investment busts

Bloomberg

Soured investments, a projected record loss and a rating cut are not turning SoftBank Group Corp. analysts and investors into bears on the stock.

That’s because they believe a massive $23 billion share buyback plan will buoy SoftBank’s shares for months to come, more than offsetting the hit from the Vision Fund’s write-downs.

Masayoshi Son’s tech giant last month cranked up the size of its share-buyback plan to ¥2.5 trillion, to be funded with proceeds from asset sales. The stock is up 38 percent since then, continuing to rise even after it said earlier this month that it will post an operating loss of ¥1.35 trillion for the business year ended in March on hits from the Vision Fund’s soured wagers on such startups as WeWork and OneWeb.

“The economics of the buyback basically trump everything else,” said Sanford C. Bernstein & Co.’s Chris Lane. “You could be a skeptic of the Vision Fund but still appreciate the effect, mathematically, of the buyback.”

Lane expects the shares to climb another 40 percent from recent levels. And he isn’t an outlier: The eternally bullish crowd of SoftBank sell-side analysts have an average 12-month target on the stock of ¥6,659, more than 50 percent above the current price. Jefferies Group’s Atul Goyal sees the buyback program giving the stock an “easy 3-9 month upside.”

“Retail investors and hedge funds are targeting a short-term rebound,” given the loss isn’t so large relative to the company’s $86 billion market capitalization plus the fund, said Naoki Fujiwara, chief fund manager at Shinkin Asset Management Co.

Elliott Management Corp. in February urged SoftBank for more transparency and a large buyback to help boost its share price, which the activist investor said undervalues the Vision Fund’s holdings in companies including Alibaba Group Holding Ltd. Other market participants had speculated that Son would sell some Vision Fund holdings to fund share repurchases.

SoftBank had executed just ¥16 billion of its planned buybacks as of the end of March, but Jefferies’ Goyal believes Son picked up the pace this month. The analyst estimates the company may repurchase about ¥250 billion of its own stock every month through next January, accounting for about 17 percent of the trading volume in SoftBank Group shares.

“That’s an extremely powerful tailwind,” he said.

While the size of the buyback plan can’t be ignored, selling down lucrative investments to cover damage from loss makers is somewhat of a double-edged sword. Alibaba currently accounts for 65 percent of SoftBank’s shareholder value, by the Japanese company’s own calculations.

“A cut-down in Alibaba stock will mean weaker equity value” for SoftBank, said Masahiko Ishino, an analyst at Tokai Tokyo Securities.

Still, Bernstein’s Lane says details on the asset sale plan will serve as a further catalyst for the stock. He estimates that while total assets will fall, total shares will fall faster.

Depending on the amount of capital gains tax paid by SoftBank on asset sales, “we estimate 15-30 percent upside in equity value per share,” he said. “Probably the only real risk right now is, they’ve announced a buyback but they don’t have the cash.”

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