EUR 850.00 For Business Accounts Only

Morningstar | SoftBank Eyeing off Second Vision Fund to Create Value

As a telecom and technology conglomerate, SoftBank represents a unique investment opportunity. The current portfolio is an even mix of e-commerce-focused Internet investments and developed-market mobile services businesses. However, the purchase of semiconductor chip designer ARM Holdings has added a wide-moat play on continued proliferation of smartphones and other Internet-connected devices. Future acquisitions are likely to be on the themes of the Singularity--the concept of computers becoming more capable than humans--and the Internet of Things, and are mostly being made through the JPY 10 trillion SoftBank Vision Fund.We expect the 63% owned domestic Japanese telecom business to remain a strong cash generator in an three-player mobile market, although Rakuten's proposed entry in 2019 could upset this balance. We doubt that Rakuten can build a sustainable network business, but the firm could cause pricing pressure while it tries. However, we are less certain about the future of SoftBank’s 85%-owned Sprint in the United States. Sprint is saddled with a very high debt load that severely limits its margin for error. While it has recently stemmed its cash burn, this has largely been achieved with severe capital expenditure reductions, which may not be sustainable with 5G investment on the horizon. We believe both Sprint and the other smaller U.S. mobile operator, T-Mobile, face the challenge of building the scale needed to compete effectively with AT&T and Verizon over the long term. With SoftBank and T-Mobile announcing a merger agreement in April 2018, we have factored in a 75% chance of this merger gaining regulatory approval given the FCC looks like it might approve the deal.We are much more positive on wide-moat-rated Alibaba. By operating some of the world's largest online marketplaces, Alibaba has played an important role in China's structural transition to online mobile shopping from brick-and-mortar retail, developing a strong network effect in the process. It is too early to call on the ARM Holdings acquisition, as SoftBank has invested heavily so far, negatively affecting short-term results.