Masayoshi Son's personal stake in SoftBank trading unit draws fire

Mr Son denied there was a conflict of interest and described it as remuneration for his investment expertise. PHOTO: REUTERS

TOKYO (BLOOMBERG) - SoftBank Group's already controversial stock and options trading programme is drawing fresh fire from investors because of Masayoshi Son's personal stake in the trading.

Mr Son faced a barrage of questions about the transactions on a late-evening call with analysts and fund managers after an earnings announcement on Monday (Nov 9), according to people who took part in the briefing. SoftBank has poured about US$20 billion (S$27 billion) into tech stocks and derivatives through a unit in which the billionaire personally holds a one-third stake.

Several people on the call pointed to the structure as a corporate governance concern, the people said, asking to remain unnamed because the details of the discussion aren't public. Mr Son denied there was a conflict of interest and described it as remuneration for his investment expertise. Other fund managers charge fees, he said, according to one of the people. Mr Son added that SoftBank's board cleared the structure in a vote from which he recused himself, the person said.

A representative for SoftBank declined to comment.

For all the controversy generated by the trading unit, SoftBank's performance has been mixed. A 292 billion yen (S$3.74 billion) derivative loss in the September quarter helped all but wipe out gains in the first quarter. That left a little over US$1 million in gains in the six months ended Sept 30, a surprising result given the rally in most tech stocks.

"It remains a mystery to me how SoftBank's investment in listed stocks could result in losses, assuming they're mostly big tech shares," Bloomberg Intelligence senior analyst Anthea Lai said. "It's hard to tell what they did. It could be catching the direction wrong or bad timing, or a bit of both."

Some analysts questioned why SoftBank is getting involved in such securities trading at all.

"Net derivative positions might be small as a percentage of asset-value, but SBG's motivations are not clear," Atul Goyal, senior analyst at Jefferies, wrote in a report. "For such a long-term investor as Mr Son, we don't understand the attraction of short-term call-spreads."

Mr Son has been on a selling spree, unloading US$53 billion of assets in a move originally meant to help reduce debt and fund buybacks. He has also used some of the proceeds to invest in US tech stocks in what the company described as a liquidity-management strategy. But the foray into derivatives trading proved costly when it was first disclosed in September. SoftBank shareholders, worried that Mr Son was off on another one of his adventures, cut the company's market value by as much as US$17 billion.

"SoftBank is more of punt on technology names," Amir Anvarzadeh, a market strategist at Asymmetric Advisors in Singapore, said in an interview with Bloomberg Television. "As long as the technology rally continues, they should do OK. But once that music stops, there is absolutely no point in investing in SoftBank."

SoftBank acquired 1.7 trillion yen of "highly liquid listed stocks" in the quarter ended in September, including a US$6.3 billion investment in, US$2.2 billion in Facebook and US$1.8 billion in Zoom Video Communications. The operation, in which Mr Son personally holds the 33 per cent stake, is managed by a new subsidiary called SB Northstar.

SoftBank's shares fell 4.7 per cent in Tokyo on Tuesday, after the rally in global stocks stalled amid concerns about a smaller US fiscal stimulus package, still surging coronavirus cases and legal challenges to the US election outcome. Tech shares were particularly hit by the news of a coronavirus shot that prevented over 90 per cent of infections. Zoom plunged 17 per cent while shares of Netflix, another SoftBank investment, slid 9 per cent.

The Japanese conglomerate said the fair value of its futures and options positions came to US$2.7 billion at the end of September, including long call options on listed stocks worth US$4.69 billion and short call options on listed stocks with negative US$1.26 billion of value.

Mr Son defended the program on Monday as a way to put to use SoftBank's massive cash pile. Besides, the derivative bets are "a rounding error" relative to the company's shareholdings, Mr Son said repeatedly on the Monday call. The options account for just 1.2 per cent of the SoftBank's US$292 billion of shareholdings.

"It is more meaningful when measured against market cap," which put the exposure at 3 per cent, Kirk Boodry, an analyst at Redex Research in Tokyo, wrote in a report. "With the next portfolio update not coming until February it is understandable why the discount to fair value remains wide."

SoftBank is using stocks in its portfolio to help fund the trading operation. Northstar borrowed US$6 billion in October with Alibaba Group Holding shares pledged as collateral, the company disclosed with earnings.

Analysts questioned why SoftBank is betting on public stocks at all. Why is SoftBank, known for its long-term technology investments, is dabbling in something so short term, one caller asked.

"If there is spaghetti, this is the spice," Mr Son answered.

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