Even A Chastened SoftBank Leans On Engineering

Sometimes it’s hard to tell which Masayoshi Son loves more: new technology or creative finance. The mercurial SoftBank (SFTBY) boss uses an abundance of the latter to fund excesses in the former. Even chastened, he is dipping into his deep well of engineering.

Son conceded last month that he was “foolish” to aggressively back the now-reeling shared-office outfit WeWork. The pandemic also pushed SoftBank into a $9 billion net loss for its fiscal year ending in March and hurt its hulking Vision Fund. With some prodding from pushy hedge fund Elliott Management, the Japanese tech and telecom company is working on finding up to $42 billion to buy back its own shares and reduce debt. Its 25% stake in Chinese e-commerce titan Alibaba (BABA) is a nice piggy bank to be able to crack open.

Instead of selling down a slug of those shares, however, Son is using derivatives linked to them to raise money. First, there is a $1.5 billion prepaid forward contract, where SoftBank pledges to sell Alibaba shares to banks on the other side of the deal at a fixed price in four years. If Alibaba’s value goes up, SoftBank will be on the hook for more, but can pay off the difference with extra shares.

The second piece, also disclosed on page 88 of an 89-page financial report, is a $1.5 billion slice using a so-called floor contract. Here, SoftBank buys some downside protection in case Alibaba’s stock falls below a certain price, while benefiting from any upside. The biggest slug collars $8.5 billion with both a floor and a ceiling, allowing SoftBank to keep a portion of the upside when settling in 2022.

This sort of wizardry is a hallmark of Son’s. He raised money similarly in 2004 using a forward contract involving Yahoo shares and again in 2016 with trust securities exchangeable into Alibaba stock. SoftBank almost certainly pays for the privilege of this fiddly approach in the form of fees to bankers.

At the same time, the company raises capital it wants without borrowing more or immediately flooding the market with Alibaba shares. SoftBank also can choose to settle with cash. If the startups Son targeted were as frequently inventive with their technology, he might not have to be with his finance.

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