The US$8.6b Yahoo dilemma facing Japan's Masayoshi Son

[TOKYO] - Masayoshi Son has a US$8.6 billion dilemma on his hands.

His SoftBank Group Corp is the largest investor in Yahoo Japan Corp, controls several board seats and wields more power over the country's most profitable website than anyone. That's been possible because Marissa Mayer's Yahoo Inc, the next biggest shareholder with 35.5 per cent, has been happy to leave management to the nation's second-richest man.

Now Yahoo is said to be considering asset sales, including possibly disposing of its US$8.6 billion stake in the Japanese portal, which may force Mr Son to spend money to maintain his grip on a company he already effectively controls. Those resources could be better used to shore up his struggling Sprint Corp or other investments without adding to SoftBank's existing US$109.4 billion in long-term liabilities.

"SoftBank faces three options: issue debt and buy it itself, hope someone friendly steps in to help or, failing all that, have the stake sold in the open market," said Masamitsu Ohki, the chief portfolio manager at Fivestar Asset Management Co. "Selling in the open market would be awful."

With Ms Mayer failing to deliver on a turnaround after three years at the helm, Yahoo's board is considering options to cope with a slump in growth. That includes an earlier plan to spin off its shares in Alibaba or sell other assets, such as its core Internet search and portal business and the Yahoo Japan holdings. No decision was announced after a meeting last week.

Despite controlling more than a third of Yahoo Japan, Ms Mayer's company has mostly kept a hands-off approach. Yahoo leases its brand and technology while letting local management call the shots, a former executive, Susan Decker, said last year.

That's given Mr Son leeway to steer Yahoo Japan closer to SoftBank, including installing President Nikesh Arora as chairman, allowing the companies to share customer information.

SoftBank, which owns 36.4 per cent of Yahoo Japan, said in November it plans to strengthen collaboration next fiscal year. The portal made up 22 per cent of SoftBank's operating profit in the six months through September.

For Yasuaki Kogure, a hostile new shareholder could challenge that, making Mr Son the most likely candidate to buy the stake should Ms Mayer sell it. Outsiders would require more consensus among shareholders, making management decisions within Yahoo Japan more difficult.

"Having the shares fall in the wrong hands would be the biggest problem, and that's what they want to avoid," said Mr Kogure, chief investment officer at SBI Asset Management Co, which holds shares in both SoftBank and Yahoo Japan, according to data compiled by Bloomberg. Still, if it was that simple, "they would have bought it a long time ago. Yahoo! Inc has probably approached them about it already in the past."

Another potential hurdle is that combining stakes the size of SoftBank's and Yahoo's may trigger a mandatory bid for the rest, an issue Mr Son could overcome by diluting the stock via a small offering, said Nicholas Benes, representative director of the Board Director Training Institute of Japan.

Alternatively, if SoftBank has to make an offer it could do so at a low price. If that's accepted, "SoftBank would be very happy. And even if it has to be delisted as a result, from SoftBank's point of view, the price was still low," Mr Benes said.

Issuing bonds through Yahoo Japan, which has almost no long-term debt, to fund a stock buyback is possible, as is relying on its US$4.5 billion cash pile to cover some of the cost. Still, as a consolidated subsidiary of SoftBank, changes to Yahoo Japan's finances would be accounted for on SoftBank's balance sheet.

Yahoo Japan would "always consider the best options" for buying back its shares, Masaki Hanyu, a Tokyo-based spokesman, said Monday. A SoftBank spokeswoman, Hiroe Kotera, declined to comment.

Shares of Yahoo Japan rose 0.8 per cent at the close in Tokyo, while SoftBank slipped 0.7 per cent and the Nikkei 225 Stock Average dropped 1 per cent. The portal has gained 21 per cent this year while SoftBank is down 12 per cent.

Despite the potential financial hurdles, Fivestar's Mr Ohki says Mr Son may still go ahead with a purchase because it plays into SoftBank's longer-term ambition of expanding into e-commerce.

In addition to Yahoo Japan, SoftBank is the biggest shareholder in Alibaba Group Holding Ltd and spent US$1 billion this year for a stake in South Korean online retailer Coupang. The investments are testament to Mr Son's goal of dominating online shopping.

"Mr Son is probably ultimately eyeing the e-commerce business, and Yahoo Japan has pretty good infrastructure for that," Mr Ohki said. "Everyone is focusing on their debt because that's the hurdle, but if they can manage that impact, then this deal might be very, very important in terms of their e-commerce ambitions."

BLOOMBERG