TOKYO: Japanese technology giant SoftBank has committed billions of dollars to bailing out office-space sharing startup WeWork in a daring vote of confidence from its intrepid founder Masayoshi Son.
WeWork’s woes are substantial enough that some analysts say they could derail the investment ambitions of SoftBank’s mammoth Vision Fund.
But, as one of the most innovative companies in conservative Japan Inc., SoftBank is no stranger to risk-taking.
SoftBank has ample funds to endure the pain from its massive bailout of WeWork, analysts said, even as it is reportedly set to write-down at least $5 billion due to a slump in the value of the US office sharing startup and some other top holdings.
SoftBank Group has agreed to offer a $9.5 billion lifeline to WeWork to take control of the US office-space sharing startup, now valued at $8 billion.
HIGHLIGHTS
• SoftBank oversees expanding conglomerate of businesses spanning telecommunications, energy and humanoid robots.
• WeWork, the New York-based company, founded in 2010, set up shop just last year in Japan, where its clients include Pinterest and Slack.
• SoftBank Group’s Chairman and Chief Executives Masayoshi Son said new companies always face challenges, but that does not mean their vision is wrong.
The deal, which comes on top of more than $10 billion investment SoftBank has already committed, is set to strain the Japanese investment firm’s bottom line.
Citing people with knowledge of the matter, Bloomberg said SoftBank would announce the write-down along with its second quarter earnings on Nov. 6.
A SoftBank spokesman declined to comment on the report.
Since spinning off its namesake telecom unit SoftBank Corp, analysts now view SoftBank as a financial holding company. More akin to a bank, the company is taking on more debt and relying on cash flows from its operating units to pay the interest.
Leverage
“From a leverage standpoint, SoftBank has some cushion to take on additional debt,” said Moody’s analyst Motoki Yanase.
Although SoftBank has an army of retail investors in yield-strapped Japan willing to buy its junk bonds, it already holds about 5 trillion yen of net debt on its balance sheet — more than half its 9 trillion yen market capitalization.
Both Moody’s and S&P Global rate SoftBank below investment grade. That means the company has to pay higher interest on its bonds and loans. The company’s weighted average cost of debt is 3.7 percent, the seventh-highest among all companies on the Nikkei 225 Stock Average, according to Refinitiv data.
Even so, SoftBank retains huge holdings in listed companies that could be sold off if the company needs cash, said S&P analyst Hiroyuki Nishikawa.
Portfolio companies backed by SoftBank and its $100 billion Vision Fund include British chip designer ARM, Slack Technologies Inc., and ride-hailing firms such as Uber Technologies Inc, Grab and Didi.
Jefferies downgraded SoftBank stock to hold from buy on Friday, saying that the WeWork rescue sets an “undesirable precedent” for the group’s private investments.
“We don’t know where the risk limit is for SoftBank given they have bet so heavily,” said Jefferies analyst Atul Goyal. Among more typical private equity funds “most of them probably let go of the failures, they don’t double down.”
