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The prospect of an acquisition of Vodafone’s Japanese operations sent the shares of Softbank sharply higher on Monday, despite concerns about the financial burden such a deal could place on the internet and telecoms services company.
Retail investors welcomed the potential tie-up, which was revealed on Friday. They believe the move would enable Softbank to realise its long-held ambition to become a leading mobile phone operator in Japan.
Softbank on Monday confirmed it was in negotiations with Vodafone but declined to comment further.
Softbank shares rose 6 per cent in midday trade before pulling back and closing up only 3.6 per cent at Y3,430 on Monday.
Shares of Softbank affiliate, Yahoo Japan, the country’s leading internet portal, closed up 7.4 per cent at Y146,000. Analysts said Softbank was likely to integrate Yahoo Japan’s content with its mobile phone data services.
Nicholas Spratt, analyst at Lehman Brothers, said in a research note that, if Softbank paid up to an enterprise multiple of five times for Vodafone Japan, a 67 per cent stake in the mobile phone operator would imply a valuation of £6.5bn and a purchase price of £4.4bn.
“Ultimately, we think any purchase will be financed by a combination of liquidated listed assets, increased debt and the securitisation of the purchased asset,” Mr Spratt said.
Standard & Poor’s, the ratings agency, on Monday placed its “BB-” long-term corporate credit and senior unsecured debt ratings on Softbank on watch with negative implications.
“The acquisition could cost Softbank up to Y2,000bn, according to media reports, which may impose a substantial financial burden on the company,” said Osamu Kobayashi, S&P analyst, in the report.
“If Softbank raises acquisition funds through a [leveraged buyout], as reported by some media, the company's consolidated debt would increase substantially.”
Softbank’s bonds weakened on news of the deal – the yield on Softbank’s 1.98 per cent bonds due in September 2010 rose 21 basis points to 2.595 per cent, the highest since they were sold in September.
Analysts said that Softbank-Vodafone would have to focus on its mobile phone services in order to woo new customers, rather than competing on price.
“Service competition will drive the market going forward rather than price competition, fuelled by new handsets and content,” said Hitoshi Hayakawa, telecoms analyst at CSFB.
“Because Softbank will likely have to borrow money from their banks to help finance the deal, their freedom for [mobile phone service] pricing may be restricted by their debt covenants.”
On Monday shares of Japan’s two leading mobile phone incumbents closed down amid worries of stronger competition in the market. NTT DoCoMo, Japan’s leading operator, was down 1.2 per cent to Y169,000 and KDDI was 1.4 per cent lower at Y580,000.
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