SoftBank sold Alibaba shares to reassure investors, CFO admits

SoftBank sold a large chunk of its stake in Alibaba to “instantly show” investors that its finances were strong after posting a record $23 billion quarterly loss, the tech conglomerate’s chief financial officer said.

In an interview with the Financial Times, Yoshimitsu Goto admitted that after years of downplaying the possibility of a sudden, large-scale exit from his stake in the Chinese e-commerce giant, SoftBank’s announcement of the sale last week has been brutal.

Goto dismissed market concerns that SoftBank’s continued heavy losses could strain its relationship with lenders, but admitted the sale of Alibaba shares was aimed at reassuring investors of what is one of the most indebted companies in Japan.

“At times like this, it’s critical as an investment group to instantly show that our financial strength is rock solid,” Goto said.

The sale of Alibaba’s stake, which came with what some investors said was an inadequate explanation from SoftBank, has prompted some to question whether it was really a move to deal with an impending financial emergency.

Just two days after announcing its worst quarterly performance, SoftBank revealed that it would post a 4.6 billion yen ($33.6 billion) gain by selling shares of Alibaba, dramatically reducing the investment on which founder Masayoshi Son has built his name as one of the greatest in the world. technology investors.

Goto said the move was designed to reflect the previous sale of some of SoftBank’s most prized holdings that began when the Covid-19 pandemic caused its share price to crash in March 2020; which included stakes in its domestic mobile unit and US carrier T-Mobile.

“Just like two and a half years ago, we wanted to show the world that we can do something like this because we are financially resilient. That was our goal,” he said.

Although the sale responded to the need to shore up the company’s balance sheet, the decision to sharply reduce Alibaba’s stake comes with the political risk of being seen exiting a Chinese investment at a sensitive time. China is in the throes of a regulatory crackdown on tech companies, and diplomatic relations between Beijing and Tokyo are strained.

In 2020, SoftBank’s $41 billion asset sale funded the largest stock buyback in Japanese history and paid off its massive debt load, helping improve investor confidence. The latest decision to sell Alibaba’s stake sent the group’s share price up 10%, but also left some analysts puzzled.

“SoftBank reduces exposure to its largest asset when [Alibaba’s] stocks are down 71% from their peak. It’s a very different message from the super positive one we’ve grown accustomed to hearing over the years,” said Redex Research analyst Kirk Boodry.

The sale of Alibaba’s stake is being made through prepaid futures, a type of derivative that SoftBank has increasingly turned to to raise immediate cash. Until recently, the company had stressed to investors that the contracts did not constitute a sale since it reserved the possibility of repurchasing the shares at a later date.

But its decision to settle the deals early by giving up the option to keep the shares means SoftBank’s stake in Alibaba will drop from 23.7% at the end of June to 14.6% when the settlement is finalized in September.

Among the concerns expressed by several investors and analysts after two consecutive quarters of significant losses was that SoftBank might breach one of its financial covenants with its lenders. The undertaking stipulates that the company must not declare two consecutive years of losses. SoftBank suffered a net loss of 1.7 billion yen in the year to March 2022.

“Our decision has nothing to do with the financial covenant. There are countless ways for us to approach the issue of the alliance,” Goto said.

He added that the main reason for the early settlement of Alibaba’s contracts was to dispel any fears that the group would need additional cash in the future to buy back the shares. “We wanted to send a clear message about our track record,” Goto said.

Robert D. Coleman