SoftBank nears end of ¥2.5 trillion buyback, imperiling bull run

Masayoshi Son has run almost all the way through ¥2.5 trillion ($23 billion) allocated to buy back SoftBank Group Corp. shares, raising concerns that his stock’s bull run will end without rapid intervention.

The Tokyo-based company purchased more than ¥2.1 trillion worth of its own shares over the past year through March, according to SoftBank filings, an unprecedented effort that more than doubled the value of the stock. Now, with only about 10% of the committed capital left, the program may run out as soon as next month, Bloomberg’s calculations show.

Already, there are signs the buybacks are losing their power to lift SoftBank’s stock. Shares declined 5.7% in March, their worst monthly performance since the pandemic-induced low a year earlier. They fell even as more money was spent on re-purchases, the overall markets advanced and SoftBank’s profit for the March quarter was expected to hit a record.

“Buybacks are coming to an end,” said Atul Goyal, senior analyst at Jefferies. “When that upward pressure on the stock price ends, the short bets may come out.”

Son hasn’t said whether he will allocate more capital for buybacks, after announcing four overlapping installments last year for a total of ¥2.5 trillion. It’s possible he would make a new commitment when SoftBank reports earnings results on May 12.

A SoftBank spokesperson said in an email that the stock price reflects not just buybacks but also shareholder appreciation of the progress being made in the investment business, declining to comment on plans for further buybacks.

After shares plunged in March 2020 with the coronavirus outbreak, Son unveiled plans to sell off assets to reduce debt and fund buybacks. He also announced a deal to sell chip designer Arm Ltd. to Nvidia Corp. for $40 billion. SoftBank’s stock touched a two-decade high before falling last month.

It’s difficult to predict exactly when the buyback money will run out, but SoftBank’s history of purchases offers clues. The company spent on average ¥200 billion a month over the past half a year and ¥253 billion in March alone, its biggest monthly outlay this year. It had just shy of ¥258 billion left in the final buyback tranche as of the end of March.

“It’s amazing how much they bought back over the past few months even though the shares are at a record high,” said Kirk Boodry, an analyst at Redex Research in Tokyo. “There hasn’t been a deceleration, and that lends credence to the idea that the company will buy back more shares when the allocation is done.”

SoftBank has also shown a willingness to make big interventions to bolster the stock against bad news and to build momentum on positive events, at times accounting for as much as 19% of trading volume. It spent over ¥50 billion in a single trading session on Dec. 10. The buybacks sent the shares 11% higher and came a day after Bloomberg broke news about Son debating a new strategy to take his SoftBank private, sparking a rally.

The company also spent more than ¥130 billion over 5 business days in mid-April last year, its single biggest week of trading, after forecasting a record annual loss as the value of its startups cratered amid the coronavirus pandemic. When the booming equity markets helped turn the losses into a record profit in the Vision Fund business in early February, SoftBank bought more than ¥34 billion of stock over two days after the results announcement.

Overall, SoftBank’s purchases have been effective. For every $1 billion spent on buybacks, the company’s market value increased by more than $6 billion — until March. That month, the company spent over $2.3 billion only to see its market capitalization slide by almost $11 billion.

The coming earnings announcement could offer another opportunity to bolster the share price. SoftBank is likely to report a full-year net income that’s the highest ever for a listed Japanese company in any quarter dating back to 1990, according to data compiled by Bloomberg. Vision Fund profit, supercharged by the successful initial public offering of Coupang Inc., may reach an unprecedented $30 billion, people familiar with the matter said.

While the profits are largely paper gains on investments, Son has plenty of cash to keep buying back stock. He paid for the original program by offloading about $16 billion of Alibaba stock, an even larger chunk of its stake in T-Mobile U.S. Inc. and some shares of SoftBank Corp., his telecommunications unit. He then went even further, announcing the sale of Arm, slashing the stake in SoftBank Corp. by about a third and selling a controlling shareholding in phone-distribution company Brightstar Corp. The conglomerate had ¥4.45 trillion in cash and equivalents as of Dec. 31.

Son, who has long railed against the gap between SoftBank’s capitalization and the value of its assets, has flirted with the idea of taking his company private as recently as last March. The buybacks may be part of a multiyear strategy of reducing outstanding shares until the founder has a big enough stake so that he can squeeze out the remaining investors, people familiar with the matter told Bloomberg in December.

The proportion of treasury stock held by the company rose from just over 1% to almost 17% in the year since the re-purchases began last March. Combined with his personal stake, Son now controls about 40% of the outstanding shares.

SoftBank’s stock has climbed almost 170% since the company started buying back shares, but gains have slowed in recent months as the corporate discount shrank. The gap has narrowed from 74% in March 2020 to about 30% without taking capital gains into the account, Jefferies’ Goyal estimates. Boodry at Redex Research sees the discount at about 40% now.

The stock will face further headwinds if the sale of Arm to Nvidia falls through, according to Justin Tang, head of Asian research at United First Partners in Singapore. Chinese technology companies including Huawei Technologies Co. are lobbying their government against the transaction, while a regulator in the U.K., where Arm is based, said it plans to intervene “on national security grounds.” At the same time, Arm is mired in a legal battle for control of its China unit with the chief executive, who was fired by SoftBank but has refused to leave.

“Unless there is a catalyst to expand its net asset value, it is probable that we will see the discount widening out again,” Tang said. “It still is a conglomerate with a lot of unlisted investments in its portfolio.”