Starstruck Softbank’s big spending sparks concern

Listen to this article

00:00
00:00

Cameron Diaz, the US actress, reportedly earned $3m for six hours’ work filming an advertisement for Softbank. At $138 a second, that is nice work for the
Hollywood star.

For the Japanese telecoms and internet conglomerate, it is par for the course. According to calculations by Tokyo analysts, it has been burning through cash at a rate of about $60 a second for more than a decade.

Softbank’s spending habits are in the spotlight after it raised $12bn last November to refinance loans taken out to acquire Vodafone’s ailing mobile telecoms carrier in Japan.

The refinancing – by a mix of western and Japanese banks including Deutsche, Citigroup and Mizuho – is securitised by cashflow from the mobile unit and marks one of the world’s biggest whole-business securitisations to date.

The 321-page loan document, recently seen by the Financial Times, lists covenants that curb Softbank’s ability to engage in high-risk buying of market share. It has to meet strict profit targets, and capital expenditure limits are set by the lenders.

This has given comfort to bond investors, who flocked to buy the bonds when trading began a few weeks later.

The structure of the loan – which essentially removes the risk that Softbank will make big investments in new and risky areas – enabled Softbank Mobile to secure higher ratings than those it enjoyed when it was part of Vodafone.

By extension, it also meant borrowing at an all-in rate of 3.8 per cent, according to Merrill Lynch’s calculations.

Standard & Poor’s, the US ratings agency, rated the tranches of WBS debt at A and BBB, above the former Vodafone Japan’s BB+.

Masahiro Shidachi, analyst at S&P, said the agency’s cashflow simulations showed that future cash flow was sufficient to redeem the debt, even after taking account of future industry trends.

“We think the competitive environment of the mobile business in Japan will not be much more fierce in the future . . . Average revenue per user, especially in voice, is on a downward trend. Still, we don’t think it will go down more dramatically than in the past.”

Credit analysts agreed. Toshihiro Uomoto at Merrill Lynch noted: “Although a decline in Arpu is a concern, Softbank Mobile’s subscriber base is growing at a healthy clip, and we think serious impediments to repayment of the WBS debt are unlikely to occur.”

Equity analysts tend to be more sceptical. Softbank is Tokyo’s most active stock, with tens of millions of shares trading a day, and one of the most volatile.

Last year the share price more than halved, while the Nikkei 225 rose 7 per cent. So far this year it has soared 32 per cent, greatly outperforming the Nikkei.

Of the 14 analysts covering the stock, just one has a buy recommendation, according to Bloomberg.

Analysts’ concerns include the group’s propensity to burn through cash and its penchant for rejigging accounting and other methodologies.

The latter, which has included extending depreciation periods and reclassifying subscribers to include those who have used their phones in the past 6-12 months, often has the effect of flattering performance.

Third-quarter results were a case in point. Softbank has stopped subsidising handsets and instead charges customers on an instalment basis over a period of two years, and provides discounted calls.

The trouble – or benefit – is that while income from handset sales is booked in full immediately, the “hit” from subsidising calls comes later, in the form of reduced Arpus.

Accounting methods used to flatter last year’s results were again in evidence in 2006. According to the latest annual report, changing the estimated useful life reduced the operating loss by $120m in the fixed line telecoms segment, while altering the depreciation method added $6m of operating income to broadband infrastructure.

In aggregate, changes in accounting policy boosted operating income by $156.5m.

The group also takes a flexible approach to the companies it consolidates. In the latest results to end-December, 64 of its affiliates were not consolidated. It has capitalised expenses and, like other Japanese companies, keeps some items off balance sheet.

While accounting changes help flatter profits, they fail to lift free cash flow (as measured by net income plus depreciation less capex), which was minus Y6.4bn in the second quarter, according to Lehman Brothers.

But, say some analysts, the discrepancy between profits and free cash flow is too large to be explained by these alone.

Moreover, with Japanese accounting now under scrutiny – following the forced restatement of results at Nikko Cordial – some expect more vigorous standards to be applied.

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't copy articles from FT.com and redistribute by email or post to the web.