Softbank Announces Internal Reorganization – Could A Spinoff Be Next?

Masayoshi Son’s Softbank (SFTBY) is shaking up its organizational structure, creating two separate, but still wholly owned, internal companies. One business will house its domestic (Japanese) businesses such as mobile and its stake in Yahoo Japan, while the other unit will contain its overseas investments. The overseas bucket will include Softbank’s investments in budding technology companies, such as Indian e-commerce retailer Snapdealer and China’s Did Kuaidi, as well as its investments in larger corporations like Alibaba (BABA) and Sprint (S). On the surface, the split appears to be simply based on geography, but there is more to this story. The domestic business is quite profitable, but growth has been slow ever since the company lost its monopoly on the iPhone in Japan. Much to the chagrin of local investors, the company has been using this cash to fund its overseas investments, not all of which have done well (looking at you Sprint). One hope is that this reorganization is a step towards keeping Japanese profits in Japan. More generally, the overseas businesses are riskier – whether due to new technology or to bankruptcy fears (in the case of Sprint) – and are more ‘wild cards’.

Although Mr. Son will be still in charge of the overall operations, the overseas unit will be run by recent hire Nikesh Arora, who is viewed by many as Mr. Son’s heir apparent. Mr. Arora is a former Google executive and his hire made waves after details of his large pay package came out. $140m in 6 months – sign me up! The Economist recently had a nice piece on Softbank questioning some of Mr. Son’s moves including the hire of Mr. Arora (and of course, his paycheck).

Naturally, talk of a domestic reorganization led to hopes of a spinoff with potential listings for both companies. The WSJ’s Heard on The Street column tallied up the value of the company’s various pieces and determined that Softbank was trading (as of the date of the article) at a 31% discount on a sum of the parts basis. How did it get to those numbers?

1. Domestic – After assigning the debt to the domestic operations, the column estimates the value of ‘SoftBank’s domestic business to around $20.5 billion, or 34% of SoftBank’s current market capitalization.’
2. International – With a 35% tax rate applied against its Alibaba stake, the ‘international business would be worth $59.4 billion, or around 91% of its current market value.’
3. Putting it all together – the ‘combined value of the two parts around $80 billion, implying a 31% upside from its current share price’

That is some conglomerate discount! If true, there is a real case for a spinoff here, especially as there appears to be little relationship between its businesses. If this were a US company, I bet some opportunistic activist would already be knocking on the door, trying to replace the board of directors. I wouldn’t count on it though, unless Mr. Son is championing the idea. Mr. Son has a massive ownership stake in the company and is extraordinarily popular and respected making it unlikely for other shareholders to go against him. Additionally, Japanese companies have been relatively resistant to corporate activists and a big part of that is the culture which isn’t changing anytime soon.

The internal reorg is expected to be completed by the end of December this year and will require a shareholder a vote. It’s certainly a first step at addressing the valuation gap, but there is no guarantee any future moves are coming. It isn’t clear that Mr. Son is ready and willing to split apart his empire.

Disclosure: Author holds no position in any stock mentioned.