If the listing goes ahead, it will be one of the largest public offerings for a Japanese company.  

Author: Andrew Woodman

Japanese tech and telecom giant Softbank Group says it may list shares in its telecoms unit in a move that will boost its investment clout and potentially face down any new competition.

In a statement, Softbank said it was looking at listing in Tokyo and overseas, specifically London, simultaneously. The move could potentially see the company raise ¥2 trillion ($18 billion) as it floats a 30% stake in Softbank Corp, Japan’s number three wireless provider. If the listing goes ahead, it will be one of the largest public offerings for a Japanese company.  

“Right now, Softbank is leveraged at about 4.6 times debt to EBITDA (earnings before interest, depreciation and amortization) and they have set a target of 3.5 times, that’s an aspirational target, but an IPO of $18 billion will bring them pretty close to that,” says Kirk Boodry, a Singapore-based analyst with New Street Research who covers Japan’s telecommunications industry.

The debt to EBITDA ratio measures the interest-bearing liabilities a company has on its books minus its cash and cash-equivalent assets. A lower ratio would mean that Softbank has enough funds to meet its financial obligations. A higher ratio would signify the opposite.

Alongside a potential deleveraging, Boodry adds that the company also has a “very aggressive plan for investment”. An IPO for the mobile business would be a way for the firm to fund part of its strategy without taking on more debt or diluting its stake in existing high-growth investments.

Softbank previously acquired US-based carrier Sprint in 2013 and picked UK chip designer ARM Holdings in 2016. The group also manages the $93 billion Vision Fund for tech investments and already has its eyes on a follow up investment vehicle.

“In order to have seed capital for Vision Fund 2, they [Softbank] will need to raise more cash,” Chris Lane, a senior analyst with Sanford C Bernstein, told Global Finance. “This could be from an IPO of the Japanese telco, a further sell-down of their [Chinese e-commerce multinational] Alibaba stake, or possibly with more debt using ARM Holding, or other assets as collateral.” Softbank bought UK-based ARM Holding for $32 billion in 2016.

This is part of the reason Softbank is eyeing a London offering. The group enjoys a certain amount of name recognition via the ARM Holdings acquisition and Vision Fund, which is headquartered in London. Softbank currently trades at a discount to its global peers. New Street’s Boodry notes that an international listing will help attract international capital, adding, “A foreign listing may assist in bring valuations closer to global developed market averages.”

Bernstein’s Lane says that developments in the Japanese telecom market, including a potential new entrant, may also bring the timing of a listing forward. Japanese regulators are looking to encourage competition and drive down fees by welcoming new telecom players.

In December, e-commerce giant Rakuten applied to Japan’s Ministry of Internal Affairs and Communications for a license to operate on the 4G network, making it the newest market entrant since Softbank. A new entrant would disrupt Japan’s mobile carrier oligopoly–which currently comprises Softbank, NTT Docomo, and KDDI–potentially triggering a price war that will cut into the Softbank’s top line.

“An aggressive new entrant would spell further downside in what we believe is a structurally unattractive Telco market–likely tipping it ex-growth,” said Bernstein’s Lane in a client note.

While Lane adds that the chance of an IPO for Softbank’s mobile unit is relatively high, he suggests a better structure might be to combine the business with Softbank subsidiary Yahoo! Japan given recent co-operation between the two.

“With Rakuten likely to enter the market, and likely to bundle benefits across their ecommerce business and their telco operation, a greater separation of the two related businesses might create disadvantages,” he said.

A SoftBank Corp IPO could come as soon as early spring. However, the group stressed in a statement that no decision has officially been made to proceed with the listing, adding, “We are always studying various capital strategy options.”

Boodry adds: “The biggest issue is valuation. They don’t want to give away equity too cheaply, so that will be the biggest impediment to the IPO happening.”