Softbank Corp.'s listing on Wednesday was the largest initial public offering in Japan's long history. The shares had a difficult birth, down 14.5% on their first day of trade. But the Japanese mobile phone company's IPO removes any confusion over the role of its parent. It may also slash the massive discount to assets that its parent company suffers in its stock-market valuation.
Softbank Corp. (T:9434) is the Japanese mobile business of separately listed Softbank Group (T:9984). The telecom's shares listed at ¥1,500, but immediately went underwater at the start of trade. Only seven of the 82 IPOs in Japan this year have broken below the offer price, Reuters notes.
Softbank Corp. shares saw the heaviest trading in Tokyo on Wednesday. But they closed at ¥1,282, the 14.5% dip far worse than the Nikkei's 0.6% slide. Parent Softbank Group, with a U.S.-listed ADR (SFTBY) , fell 0.9% in Tokyo trade, but should be a long-term beneficiary of shedding its mobile operations.
Softbank Group is the investment holding company founded by Japan's best-known entrepreneur, the charismatic Masayoshi Son. It's now very clearly a tech-investment company that represents an investable venture-capital fund that "everyday" investors can easily access.
It owns a 29% stake in Alibaba Group (BABA) , a $100 billion holding worth more than Softbank Group's entire $80 billion market cap. It also owns major stakes in Uber, Grab, Didi Chuxing, and a host of other tech companies. The only thing muddying the waters now that it has spun off the Japan mobile unit is its 85% ownership of U.S. mobile-phone provider Sprint (S) .
Telecoms used to seem high-tech but are now akin to "widows and orphans" utility stocks. Softbank Corp. has sought to sweeten ownership for shareholders by pledging a dividend payout of 85% of profits, far higher than competitors, which would lead to a dividend yield of around 5%.
That's extremely attractive in a nation where 10-year Japanese government bonds produce no returns. Risk-free "income" of 0.04% on a 10-year JGB is not much riskier than a stock that keeps churning out regular cash payments.
Investors looking for growth should go for Softbank Group, which doesn't pay a regular dividend. Investors looking for a steady holding that spins off predictable cash should go for Softbank Corp.
Softbank Corp.'s poor initial performance will disappoint the typical retail investor in Japan. The underwriters ran TV advertisements for the stock listing, a first in Japan, joking about how "everyone" was talking about Japan's record IPO.
The underwriters say the retail portion was two-times oversubscribed, and the portion for overseas institutional investors three-times oversubscribed. In terms of size, the IPO approaches Chinese e-commerce site Alibaba's record-setting $25 billion IPO in New York in 2014. Softbank Corp. now has a market cap of $54.5 billion.
The listing of the mobile operator has been clouded by a nationwide network outage that Softbank Corp. suffered earlier this month. The controversy surrounding the arrest of the daughter of the founder of China's largest telecom, Huawei Technologies, has not helped sentiment in the sector. Softbank Corp. is Huawei's biggest telecoms customer in Japan. It is looking to replace Huawei's 4G network equipment in its infrastructure with hardware from Ericsson (ERIC) and Nokia (NOK) , the Nikkei Asian Review reports, although it says the switch to Ericsson caused the outage.
Stripping the telecom business out of the parent company has raised ¥2.65 trillion ($23.5 billion) for its parent, which will maintain a stake of around 63% in the subsidiary. Most importantly, though, it carves off the telecom business from the tech investing that is now at the heart of Softbank Group.
Softbank Corp. is Japan's third-largest mobile carrier, behind NTT DoCoMo (T:9437) (U.S. ADR (DCMYY) ) and KDDI (T:9433) (U.S. ADR (KDDIY) ). All three operators face government pressure to lower costs for consumers. They will also face increased pressure when Japan's largest e-commerce company, Rakuten (T:4755) (U.S. ADR (RKUNY) ), launches its mobile service, a move planned for October 2019. Rakuten, "Japan's Amazon.com," (or Alibaba) aims to undercut the existing operators.
Chief Cabinet Secretary Yoshihide Suga said during a speech in August that Japan's mobile carriers had room to cut prices by about 40%. That knocked 5% off shares in the sector, or around ¥1 trillion.
Suga is a close ally of Japanese Prime Minister Shinzo Abe, and a key player in his administration. A research panel from the Ministry of Internal Affairs and Communications is now researching how to lower mobile-phone fees.
Softbank was the first carrier to introduce the iPhone into Japan, back in 2008. Apple's phones now account for half of sales. But the government is also keen to clamp down on the practice of bundling phones with mobile-phone contracts. Customers normally get a "free" phone when they sign a fixed-term contract.
The government worries this deters competition and confuses the cost of phone handsets with mobile services. A survey by the communications ministry found the average Japanese household spent ¥100,250 ($880) on mobile-phone plans in 2017, up 20% in five years.
Son says Softbank Corp. will outstrip the telecom competition by cutting the work force by 40% over the next two to three years, emphasizing a shift to automation. It's also emphasizing its other businesses, like mobile payments. It forecasts growth in revenue of 3.3% in the year through March 2019, and a 9.7% increase in operating profit.