TOKYO • SoftBank has devised a clever way to cash in some of its investment in Alibaba. The Japanese tech and telecom group has offloaded stock in the Chinese e-commerce giant worth US$10 billion (S$13.6 billion), yet ensured those shares will not hit the market any time soon. The fiddly structure solves a particular set of problems for SoftBank.
When chairman Masayoshi Son first invested US$20 million in Alibaba in 2000, he could hardly have imagined the investment would balloon to US$65 billion.
Mr Son built his corporate empire by borrowing heavily to finance acquisitions, transforming a humble computer software distributor into a global technology giant.
While earlier bets like Alibaba paid off, the recent purchase of money-losing Sprint Corp backfired. He saw the value of his company shrink over the past two years as the carrier's losses mounted, and SoftBank's debt pile grew to a record 11.9 trillion yen (S$138.2 billion).
Faced with rising debt, the Japanese group was under increasing pressure to take some money off the table. Yet any disposal of Alibaba shares faced several challenges.
SoftBank is not registered with the United States Securities and Exchange Commission, so it could not offer Alibaba shares directly to public investors.
It also wanted to raise multiple billions of dollars, but avoid selling at a big discount.
SoftBank partly solved this problem through a series of off-market transactions. Alibaba itself bought back shares worth US$2 billion, while the Chinese group's senior executives snapped up another US$400 million. Wealth funds Temasek and GIC signed up for a further US$1 billion. However, SoftBank still needed to tap public investors.
The solution was to sell bonds, in a trust, that will be exchanged into Alibaba shares after three years. Meanwhile, investors in these "mandatory exchangeable trust securities" receive a 5.75 per cent annual coupon, with the trust's excess cash parked in government bonds. The minimum price for the exchange is US$76.69 - Alibaba's closing price on June 1.
But if the stock rises, the trust scales back the number of shares that investors receive. This ensures that SoftBank keeps the first 17.5 per cent of any upside.
Despite the convoluted structure, the selldown looks to be a stylish way of jumping over numerous hurdles.
In addition, SoftBank plans to sell 73 billion yen worth of shares in GungHo Online Entertainment. It is also in discussions to exit Finnish game developer Supercell Oy, according to people familiar with the matter, a deal that could increase the amount raised via asset sales to US$14 billion.
"The asset sales seem to be an extremely good sign that the company is serious about improving liquidity and its balance sheets," said analyst Satoru Kikuchi from SMBC Nikko Securities. "In addition to boosting cash reserves, this should also help with the company's credit standing and valuation."