November 13, 2018 / 5:54 AM / a month ago

Breakingviews - SoftBank turns to dividends to dial up IPO appeal

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 is turning to dividends to dial up the appeal for its Japanese mobile unit. Masayoshi Son’s conglomerate wants to raise as much as $23 billion with an initial public offering due later this month. That implies a chunky premium to its rivals, and leans on generous payouts too. A looming price war will make it difficult, though, to keep up promises to hand out almost twice as much of its earnings as the likes of NTT Docomo and KDDI.

Certainly, the technology-to-telecoms group is not selling out cheaply. Add a hefty $27 billion of net debt to the nearly $63 billion market value implied by its fundraising target, and the group will be valued at nine times its EBITDA for the financial year that ended in March. That’s a stretch, given peers NTT Docomo and KDDI trade at six and five times trailing EBITDA - even considering the SoftBank unit is more profitable, and that there may be intangible benefits from being part of Son’s empire. Breakingviews calculates a valuation closer to seven times may be more sustainable.

To woo Japanese retail investors and others, SoftBank is promising chunky dividends. The group says the mobile unit will hand out 85 percent of net profit to shareholders - including, of course, a cash-hungry parent. While that’s not unheard-of generosity – indeed, Australia’s Telstra has handed out more – its far less leveraged peers KDDI and NTT Docomo pay closer to 40 and 50 percent, respectively.

Large handouts were possible in the last financial year, thanks to $4.5 billion of free cash flow, but are likely to become considerably harder. Not only is the government pressing telcos to reduce service fees to get Japanese consumers spending, but e-commerce heavyweight Rakuten is due to enter the domestic mobile market next year, shaking up a staid sector. 

SoftBank says it is taking steps to address looming threats by moving 40 percent of staff from the mobile unit to other ventures within the sprawling group, and thereby cutting costs. That will help if it happens. But Japan’s population is ageing and declining, and the market is nearly saturated. Investors may wish to dial up with caution.

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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