SoftBank Mobile’s much-hyped IPO was a big win for SoftBank CEO Masayoshi Son and his bankers, and a stunning disappointment for Mrs. Watanabe.
Despite raising a record 2.6 trillion yen ($23 billion) based on its opening price – a record sum for an IPO in Tokyo – SoftBank Mobile’s trading debut was marred by a nearly 15% drop as concerns about a recent service outage, a looming price war between Japanese telecom companies, and risks stemming from SoftBank’s relationship with Huawei and Saudi Arabia, scared away retail investors upon whom SoftBank had depended to account for the bulk of buyers. It’s also worth noting that the IPO unfolded against a negative backdrop for Japanese stocks, which have fallen this year (alongside their peers in China, the US and elsewhere). Of those who bought at the offered price of 1,500 yen ($13.35), 90% were retail traders and only 10% were institutions – with the lack of institutional representation cited by analysts as another reason for the weak trading performance.
The debut was the second-worst in recent Japanese history, second only to Japan Display Inc.’s 2014 flop.
Still, as Bloomberg explains, the debut was a massive success for Son, who will still pocket more than $20 billion through the sale of one-third of the stake in his company’s mobile unit, giving SoftBank even more cash to invest in cutting-edge startups via its Vision Fund and other vehicles.
The IPO was a victory for Son, who is amassing more cash to bet on new enterprises even in the middle of the Topix stock index’s worst year since 2011. A network outage just before the sale spooked investors, as did Rakuten Inc.’s planned entry into Japan’s 7 trillion yen wireless market. But by getting individuals to buy into the offering with an attractive yield, Son was able to raise funds even though future profitability remains a big question, according to Chris Lane, an analyst at Sanford C. Bernstein & Co.
“The backdrop is incredibly negative. To sell something with a price at this level is converting lead into gold,” Lane said. “Like in all transactions, there is a buyer and a seller. In this case, SoftBank Group is the seller and I think that they have sold well.”
The day-one drop is also a reflection of the fact that SoftBank and its underwriters – Nomura Holdings Inc., Deutsche Bank AG, JPMorgan Chase & Co., Sumitomo Mitsui Financial Group Inc., Mizuho Financial Group Inc. and Goldman Sachs Group Inc. – had been determined to fetch a high price for the IPO. The underwriters were so confident, they demanded a single price during the IPO pricing stage (typically, shares price in a range), and they stood by their price despite a recent service outage and the controversy surrounding SoftBank’s connections to Chinese telecom giant Huawei. Ultimately, they were successful: The price action confirms that they didn’t leave a single yen on the table.
To try and justify the high price, SoftBank offered a generous dividend made even more attractive by Japan’s rock-bottom interest rates.
Telecommunications carrier stocks usually trade at around 5 to 6 times earnings before interest, taxes, depreciation and amortization. Nearest rivals NTT Docomo Inc. and KDDI Corp. trade at about 4.4 times and 5.5 times EBITDA, respectively. SoftBank’s IPO was priced at 8.2 times, according to Bernstein’s Lane.
“It was pricier compared with its rivals,” said Makoto Kikuchi, founder of Myojo Asset Management Co. “They went out of their way to set the price at a premium.”
To justify that premium, SoftBank is offering a dividend payout ratio of about 85 percent of net income. Based on earnings in the latest fiscal year and the 1,500 yen price at offering, that would work out to a yield of almost 5 percent, an attractive return in a country where interest rates are close to zero.
“It’s disappointing,” said Hideyuki Sakai, who runs a technology company in Tokyo and bought 1,000 shares in the IPO. “I am holding the shares for a while, anticipating the high dividend payment.”
According to the Wall Street Journal, institutional investors stayed away because they thought the deal was “too pricey”. But the drop doesn’t matter for Son; the company already received its payout, and by maximizing the value of the IPO, it can also maximize the value of the investments it’s planning to make with the proceeds. And though retail investors may have gotten their faces ripped off in the IPO, they’ll recoup it on the back end thanks to a dividend that could be as much as 5%.
So everybody wins, right?
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