Softbank Group (OTCMKTS:SFTBY) announced March 23 that it is looking to sell as much as $14 billion of its stake in Alibaba (NYSE:BABA). That’s part of the conglomerate’s plan to raise $41 billion through asset sales meant to shore up its balance sheet and keep activist investors like Elliott Management from taking more aggressive measures against Masayoshi Son’s struggling empire. Owners of Alibaba stock should not take this as a slight against the e-commerce giant.
That’s because Masayoshi Son has gotten himself into a bit of a pickle after generating massive losses from poor investments in WeWork, Oyo Hotels and several others. As part of the plan, Softbank intends to repurchase as much as $18 billion of its stock, pay down some of its debt, and increase its cash reserves.
“This program will be the largest share buyback and will result in the largest increase in cash balance in the history of SBG, reflecting the firm and unwavering confidence we have in our business,” Son said in its press release. “This will allow us to strengthen our balance sheet while significantly reducing debt. Moreover, the monetization of assets represents less than 20 percent of the Company’s current asset value.”
Alibaba Is Softbank
Currently, Softbank has $245 billion of assets on its balance sheet, with its 25.5% ownership stake in Alibaba accounting for 53% ($130 billion) of those assets. That’s despite Alibaba stock falling 8% year to date through March 26.
As Alibaba goes, so goes Softbank.
In 2000, Softbank led an investment syndicate to invest $20 million in Alibaba, long before it went public in 2014. Before Alibaba’s initial public offering, Softbank owned 34.1% of its stock and 32.4% after. Although it’s sold off some more shares since, even if it sells $14 billion worth of Alibaba shares, it will still own approximately 23% of the company, accounting for 48% of its total assets.
Given the size of Softbank’s stake, there is little hope for Masayoshi Son to monetize its Alibaba stock in one quick transaction. This unwinding is going to take years.
Bloomberg contributor Tim Culpan recently made the case that a significant portion of Softbank’s pre-tax profits for the nine months ended Dec. 31, 2019, were as a result of Alibaba.
“Almost half of SoftBank’s pre-tax net income for the nine months to Dec. 31 were pure paper profits tied to Alibaba. A quarter came from a revaluation of its stake when Alibaba listed in Hong Kong last November. Another portion came when Alibaba took equity in its fintech unit, Ant Small and Micro Financial Services Group Co.,” Culpan wrote March 23.
“If not for these one-time gains, SoftBank’s pre-tax profit would have dropped 34%.”
Also, Culpan points out, Softbank’s taken out margin loans to the tune of more than 1 trillion yen ($9.3 billion) against its stake in Alibaba. Without Alibaba, it doesn’t have near the borrowing capacity.
While I agree with most of Culpan’s points in his Bloomberg opinion piece, the idea that Softbank should sell more Alibaba stock before it falls another 20% seems a little shortsighted.
Softbank has made an enormous amount of money from Alibaba. So, I get the idea that a bird in the hand is better than two in the bush. However, unless it’s got something better to do with the $100-billion-plus in cash it would realize from any sale, I don’t think it makes sense to look a gift horse in the mouth.
The Bottom Line on Alibaba Stock
Earlier in March, Matt McCall made a good point about Alibaba and the Chinese economy, suggesting that as the country comes out of the coronavirus-led slowdown, consumer spending will have nowhere to go but up. That will most definitely help Alibaba’s stock move higher.
Down only 8% year to date, compared to a 19% decline for the U.S. markets, on the whole, Alibaba has held up quite well.
In February, I held off wholeheartedly recommending Alibaba stock, arguing that investors should wait until May to find out the damage inflicted by the coronavirus in China. At the time, it was trading around $205. Alibaba fell to $176 before rebounding in the last week.
Long term, it’s a buy, but you might want to see if you can get some when the next round of selling comes between now and the summer.
As for Softbank, it would be wise to hang on.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.