November 12, 2018 / 2:57 AM / a month ago

Breakingviews - SoftBank mobile IPO calls for bullish Mrs Watanabe

Japan's SoftBank Group Corp Chief Executive Masayoshi Son attends a news conference in Tokyo, Japan, November 5, 2018. REUTERS/Kim Kyung-Hoon

HONG KONG (Reuters Breakingviews) - SoftBank’s mobile phone unit could be worth around $70 billion when it floats, according to Bloomberg. Selling more than a third of the stock would make its initial public offering the biggest on record. That valuation could be too aggressive, though, according to Breakingviews calculations. With a heavy focus on retail investors, it’s ordinary Japanese who will need to be persuaded to pay up.

The business built by SoftBank’s Masayoshi Son probably deserves to trade at a premium to its two major domestic rivals, KDDI and NTT Docomo. Both are less profitable and lack the edge in enterprise services SoftBank has through joint ventures with technology companies it has backed. Son’s investment strategy is arguably more synergistic than that of KDDI, which last month bought a chain of work-experience theme parks where kids can pretend to be pizza chefs and car dealers.

KDDI and Docomo trade at enterprise value-to-trailing EBITDA multiples of around five and six times, respectively. Say SoftBank’s spinoff merits a seven-times multiple. That would peg the all-in worth of its business at just over $70 billion. SoftBank is also expected to attach plenty of borrowing to the unit. Strip out $18 billion of net debt, in the range of what CLSA thinks the unit could hold, and its equity would be worth about $55 billion. That’s over 20 percent lower than the figure Bloomberg’s sources are touting.

Much of the offering is likely to be targeted at retail investors, and Japanese brokerage giant Nomura is leading the sale. Individuals accounted for nearly a fifth of the Tokyo market’s $6 trillion capitalisation as of March, according to Japan Exchange data, so there’s plenty of capacity. But the last big, overpriced Tokyo IPO that Nomura’s legions of brokers sold to moms and pops was Japan Post in 2015, which was widely shunned by institutional fund managers and is now under water.

The SoftBank mobile business could have even more debt, in theory pushing down its equity value further. But analysts also reckon its parent will want generous dividends, something that will appeal to retail investors too. With the Nikkei 225 Stock Average down 8 percent since October, though, Son and Nomura are going to need Mrs Watanabe to be in a bullish mood.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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