SoftBank founder Son may use Yahoo Japan to raise more debts

A SHOE just dropped for Masayoshi Son. Shares of Yahoo Japan Corp rose as much as 13% yesterday after SoftBank Group Corp said it would buy US$2bil worth of stock in the Internet portal, or an 11% stake, from Altaba Inc.

Investors were elated because the block sale eased concerns over a messy open-market sale that could hurt minority shareholders. After the deal, SoftBank will own about 54% of Yahoo Japan, while Altaba will be left with 27%.

The question now is what Son plans to do with Yahoo Japan.

The SoftBank founder doesn’t like to let his investments sit idle. SoftBank has regularly used its Yahoo Japan shares as collateral for bank loans at home.

The strategic value of the stake has diverged from its market price as the stock plunged by a third in four months before yesterday’s surge. But now that SoftBank has control, Son can do more.

Yahoo Japan is a cash cow that can reliably generate US$2bil of earnings before interest, taxes, depreciation and amortisation (EBITDA) per year. As I have argued, the Internet company could raise as much as US$12bil of loans based on a ratio of 5 to 6 times EBITDA – the scale of financing private-equity firms can obtain.

For SoftBank, using Yahoo Japan’s balance sheet beats borrowing against the value of its stake, given that banks often deeply discount stock used as loan collateral.

SoftBank is looking to list its domestic telecom business, so the company can no longer use that subsidiary’s cashflow as guarantees for corporate loans. A new source of liquidity certainly would come in handy for a conglomerate that has more debt than Venezuela.

A snag is that Yahoo Japan’s management has a different plan. The company is tussling with Rakuten Inc in a land grab for Japan’s e-commerce market. Yahoo Japan has promised to sacrifice as much as 30% of its 2018 fiscal year operating income in this quest.

Competition is stiff, with even Amazon.com Inc marching in. Over the past three months, analysts revised down their estimates for Yahoo Japan’s 2019 earnings by 21%, sending the shares tumbling. E-commerce is a rare bright spot in Japan, but will Son use his firepower to combat Amazon, which is offering sweeteners to members of its Prime subscription service as well as teaching its voice assistant to speak Japanese? More likely, SoftBank will target more vibrant markets such as India and the US, just as it has done in the past.

He couldn’t be blamed. The conservative nature of Japan Inc – perhaps exacerbated by the 2011 tsunami – has led to a nation with no animal spirits. After the initial public offering of e-commerce operator Merceri Inc, Japan has just one unicorn. China produced 35 since the start of 2017 alone.

So the chances are Son will take the private-equity view. Prepare for Yahoo Japan to pile on more debt.