There Are More Reasons For Softbank To Sell Alibaba Than Beijing

The news that SoftBank Group Corp. will continue to sell its stake in Alibaba Group Holding Ltd. should not be a surprise to anyone. There may be a growing need to reduce exposure to Chinese industry as Beijing continues to impose restrictions on Chinese companies, particularly the internet sector. However, there are still plenty of other factors that make cashing out a key strategy closer to home.

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As an example of the biggest global stock market selloff in a decade, let’s take the largest global stock market downturn since the early '90s as one example. Six years ago, chairman and founder Masayoshi Son reoriented the company as a venture capital firm that is publicly traded. His SoftBank Vision Fund has relied on the steady flow of share listings to maintain a steady income stream, which contrasts with the old days when phone companies were considered a great bet in times of downturn. Besides revaluations of portfolio companies after they raised fresh rounds of funding, the fund has also made a lot of money from revaluations at these companies in addition to public equity markets.

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In the past few years, SoftBank Group has been suffering from the loss of earnings due to the Vision Funds, which, together with SoftBank Group's two Vision Funds, have been dragging down SoftBank Group's earnings. It is primarily due to a continued decline in the value of the funds' holdings of public companies as well as private unicorns, which has been the main cause of this decline. They have a combined value of $5 billion and have been losing money since their inception, and they have lost a total of $5 billion in December.

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Despite this, these rises and falls in profits (and losses) are merely a function of the rise and fall in IPOs. One issue that is more pressing is the fact that there are no fresh funds being brought back into SoftBank funds or its own firm. 

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It is crucial to Son’s empire to have enough cash for a number of reasons. First, Son set the Vision Fund up at the beginning of the project to pay the Vision Fund 7% in annual payments on $40 billion in preferred equity, regardless of how much the fund earns. Even though over half of the priority capital has been returned to investors, the fund will still need to keep disbursing cash regardless of what happens to the remaining portion of it. There are, however, certain conditions that must be met before any money can be passed on to SoftBank Group from this special shareholder group prior to any of the money flowing in.

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SoftBank's debt also stands at 31.7 trillion yen at the end of December, or $235 billion in today's currency terms. While it is quite clear that SoftBank has been able to pay off five trillion yen in interest-bearing obligations by the end of December, but what is particularly telling is that it also raised 6.5 trillion yen in the market in the nine months leading up to Dec. 31, while paying off less than one-eighth of that debt. The majority of the funds were introduced to the company through the use of stakes in ARM Holdings Ltd. and Alibaba as collateral.

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He's dined on Alibaba's early bet ever since, and it's been a career-defining move for him. SoftBank's investment in the Chinese e-commerce giant has run its course. Reports that the company will sell a larger stake in the company are not surprising to anyone who pays attention. As Beijing cracked down on internet companies 18 months ago, as well as when the Covid-19 pandemic hit the Chinese economy hard and stymied global trade, this process began in earnest.

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The Japanese company raised funds, usually by offering margin loans, with Alibaba as collateral, or by selling prepaid forward contracts, with the issuance of 690 million American Depositary Shares worth $147 billion by the end of 2019. The company used these holdings to raise capital over the next year. The latter strategy involves taking cash from a counterparty and pledging to deliver shares at a predetermined price, usually on a specified date, in exchange for the money. There is one peculiar aspect of these forwards, though, and that is that SoftBank would actually report a loss on the transaction if Alibaba stock rose during the quarter, though it would be offset by the profit the company made on its holdings.

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After that, SoftBank maintained a stake in the company that remained mostly at the same level for the rest of the following two years. According to Alibaba's stock price on the New York Stock Exchange, the value of these shares and the proportion of its balance sheet that was attributed to Alibaba fluctuated quarterly.

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There followed a gradual change in the situation. After the end of June 2020, the ratio of SoftBank's Alibaba shares that were put up as collateral or were subject to forward contracts soared to 55%, according to Trade Algo calculations based on company statements. In the following quarter, its actual holdings of ADS began to drop. In the beginning, it dropped by five million ADS one quarter, and seventeen million ADS the following quarter. And then it began to drop precipitously.

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According to Trade Algo estimates, SoftBank's free and clear stake in Alibaba dropped from over $50 billion at the end of 2021 to around $16 billion at the end of December 2022, meaning it was no longer pledged for loans or forward contracts. There was a 25% drop in the share price of Alibaba last year which contributed a great deal to that deterioration, but the simple fact is that SoftBank is leaving Alibaba entirely. The company's free and clear stake, according to Trade Algo, is likely to be in the single digits.

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As much as this may be surprising to investors in both companies, it makes perfect sense to the investors. In addition to Beijing's heavy hand and heightened tensions with much of the world, Son knows that Alibaba's best days are behind it, and this is not just because of Beijing's heavy hand. It is also due to the slowing growth of the Chinese consumer economy.

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Although it is true that much of Alibaba's share decline is related to antitrust investigations and its founder, Jack Ma, who has repeatedly been harshly critical of regulators before disappearing from public life, a greater challenge is a malaise in local spending, which has plagued Alibaba for some time now. Last month, Alibaba Group announced that it would split itself up into six Baby Babas in an attempt to unlock value from the company. While the company could have hung on in the hope of a rebound, instead SoftBank is cashing out and focusing on its own investment, which is of greater importance now than ever before.

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There is more to SoftBank than just servicing its debt and trying to find new deals, as it also uses every spare bit of cash it can to buy back shares in an effort to boost its stock price. The plan seems to be working. As a result of a $4 billion repurchasing spree during the December quarter, Alibaba's shares rose 15% during that period, their best return in two years. But it is the situation that will be especially difficult when Alibaba's stakes are all sold off. Those who are interested in investing in Son can be assured that their funds will be tapped frequently as the company prepares to re list semiconductor manufacturer ARM overseas, as SoftBank is soon to turn over control of the company to ARM.