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SoftBank IPO's weak debut still a win for Masayoshi Son

By getting individuals to buy into the offering with an attractive yield, Mr Son was able to raise funds even though future profitability remains a big question.


MASAYOSHI SON raised 2.65 trillion yen (S$32.3 billion) by pulling off the world's second-largest initial public offering ever. Investors weren't so lucky.

SoftBank Corp, the Japanese telecommunications business of the billionaire's technology empire, dropped 14.5 per cent to 1,282 yen at the close in Tokyo on Wednesday, hurt by concerns over an impending price war that could hit profits. That's the biggest decline for a major IPO since Japan Display Inc's flop in 2014. Of those who bought at the offered price of 1,500 yen, 90 per cent were individuals; the rest were money managers.

The IPO was a victory for Mr Son, who is amassing more cash to bet on new enterprises even in the middle of the Topix stock index's worst year since 2011. A network outage just before the sale spooked investors, as did Rakuten Inc's planned entry into Japan's 7 trillion yen wireless market. But by getting individuals to buy into the offering with an attractive yield, Mr Son was able to raise funds even though future profitability remains a big question, according to Chris Lane, an analyst at Sanford C Bernstein & Co. "The backdrop is incredibly negative. To sell something with a price at this level is converting lead into gold," Mr Lane said. "Like in all transactions, there is a buyer and a seller. In this case, SoftBank Group is the seller and I think that they have sold well."

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That was reflected in the shares of SoftBank Group Corp, which still holds about two-thirds of the domestic phone unit and saw its shares decline by less than 1 per cent on Wednesday. Cash from the IPO will give Mr Son the ability to make further investments in global technology companies through the US$100 billion Vision fund, a portfolio that already includes Uber Technologies Inc and WeWork Cos.

Still, the decline in the new SoftBank listing puts it just behind Japan Display's weak market debut in 2014, Japan's worst major IPO in at least a decade. It was clear from the beginning that SoftBank and its underwriters - Nomura Holdings Inc, Deutsche Bank AG, JPMorgan Chase & Co, Sumitomo Mitsui Financial Group Inc, Mizuho Financial Group Inc and Goldman Sachs Group Inc - were determined to pull off the IPO at a high price.

They were confident enough of demand to issue a single price instead of a range, which has never happened for an IPO in Japan. And they kept that figure during the final bookbuilding process, even with the outage and a global equities selloff. Including a greenshoe over-allotment of about 160 million shares, SoftBank sold a total of roughly 1.76 billion shares.

Telecommunications carrier stocks usually trade at around 5 to 6 times earnings before interest, taxes, depreciation and amortisation. Nearest rivals NTT Docomo Inc and KDDI Corp trade at about 4.4 times and 5.5 times Ebitda, respectively. SoftBank's IPO was priced at 8.2 times, according to Bernstein's Lane.

"It was pricier compared with its rivals," said Makoto Kikuchi, founder of Myojo Asset Management Co. "They went out of their way to set the price at a premium." To justify that premium, SoftBank is offering a dividend payout ratio of about 85 per cent of net income. Based on earnings in the latest fiscal year and the 1,500 yen price at offering, that would work out to a yield of almost 5 per cent, an attractive return in a country where interest rates are close to zero.

"It's disappointing," said Hideyuki Sakai, who runs a technology company in Tokyo and bought 1,000 shares in the IPO. "I am holding the shares for a while, anticipating the high dividend payment."

The key to pulling off the IPO was marketing it to retail investors. SoftBank's underwriters came up with an unusual television marketing campaign to attract a broad range of investors. In a 30-second television spot, a multigenerational family with antennas on their heads is eating breakfast. The appendages blink, alerting them to what eventually became one of the country's most disappointing market debuts of the past decade. BLOOMBERG