The Economist - USA (2022-05-21)

60 Business TheEconomistMay21st 2022

tendstolistandthatmaynotchangewhile

marketconditionsremainrough—which

couldbeforsometime.

Arm,whichisnowexpectedtolaunch

anipo, mayoffera reprieve.MrSonwants

tolistthechipmakerbythemiddleofnext

year.Butevenoptimistsdoubta flotation

canfetchanythinglikethesumNvidiawas

offeringbeforeregulatorssteppedin.At

the bullish end, Pierre Ferragu of New

StreetResearch,aninvestmentfirm,sug­

gestsArmmaybevaluedatorabove$45bn

in the publicmarket—$13bn more than

SoftBankpaidforitin 2016 butwellshyof

Nvidia’sbid.Morebearishly,MioKatoof

LightstreamResearch,a firmofanalystsin

Tokyo,sayshestrugglestoimaginethat

thechipfirmisworthmorethan$8bn.

MrSon’sproblemsdonotendwiththe

assetsideofhiscompany’sbalance­sheet.

Itsdebt,too,looksproblematic.Inthenear

term,itappearsmanageableenough.Soft­

Bank’sbondredemptionsinthecoming 12

monthsaremodest:$3.3bn­worthwillma­

tureinthecurrentfinancialyear,andan­

other $6.8bn between April 2023 and

March 2024. SoftBank’s $21.3bn in cash

wouldbe more than adequate to cover

thoserepayments.MrSonhaspointedout

thatdespitetheheavyinvestmentlosses

hiscompany’snetdebtasashareofthe

equityvalueofitsholdingshasremained

largelyunchanged,ataround20%.

The price of credit default swaps

againstSoftBank’sdebt,whichpayoutif

thecompanydefaults,tella differentstory.

Acrossmostmaturitiesfromoneyearto

tenyears,theswapshaveonlybeenmore

expensiveonceinthepastdecade—during

the market turmoil of March 2020, as

countries went into the first pandemic

lockdowns(seechart2).Thegrouppos­

sessesotherlargeliabilities:itsoriginalVi­

sionFund,a giganticvehicleforspecula­

tivetechinvestments,hasnoshort­orme­

dium­termdebtofitsownbuttheholders

of$18.5bninpreferredequitytiedtoitare

entitledtoa 7%coupon,regardlessofthe

performanceoftheunderlyingholdings.

Moreover, SoftBank doesnot include

marginloansagainstholdingssuchasAli­

baba initspreferred loan­to­valuemea­

sure.Thefulldetailsofsuchloansarenot

disclosed.Ontopofthat,asofmid­Marcha

thirdofMrSon’s$18bnstakeinSoftBank

waspledgedtoa rangeofbanksascollater­

al for his own borrowing. The detailed

agreementsthatgovernsuchdealsaren’t

public,soitisunclearwhenorwhether

margincallsthatforcesalesofthoseshares

couldbetriggered.Thatcouldputdown­

wardpressureonSoftBank’sshareprice.

AllthishelpsexplainwhySoftBankshares

haveconsistentlytradedata largediscount

tothenetvalueofitsassets(seechart3).

MrSon’sadmirers,a vocalifdwindling

bunch, pointout thatSoftBankstill has

plentygoinginitsfavour.ItsJapanesetele­

coms business, SoftBank Corp, remains

profitable(andhelpedoffsetsomeinvest­

mentlosses).Ithassurvivedpreviousbear

marketsintact,includingthedotcombust

attheturnofthecentury—notleastthanks

toMrSon’searlybetonAlibaba.It isnotin­

conceivablethatoneofSoftBank’scurrent

wagersprovesequallysuccessful.

Asforfuturegambles,MrSonstruckan

uncharacteristicallysobernoteinthelat­

estearningscall.Privatefirmsadjusttheir

valuationsayearortwoafterthepublic

market,hesaid,sotheyarestillcommand­

inghighmultiples.“Theonlycureistime,”

hemusedphilosophically.Perhaps.Except

thatinotherways,timeisnotworkingin

SoftBank’sfavour.n

Hardlanding

SoftBankGroup,$bn

Source:Bloomberg

1

20

10

0

-10

-20

22202018

Netprofit

20

10

0

-10

-20

22202018

Freecashflow

New default settings

SoftBank Group

Credit-default-swap spreads, % points

¥trn

2

3

6 5 4 3 2 1 0

222120191817162015

Ten-year

Five-year

One-year

Sources:S&PCapitalIQ;NewStreetResearch;

RefinitivDatastream

30

25

20

15

10

5

0

222018161412102008

Estimated net asset value

Market capitalisation

E

lonmuskrecentlysuggestedhe

might introduce an edit button to

Twitter, to let users revise injudicious

tweets. He might wish such a thing

already existed. Less than a month after

tweeting that he looked forward to

unlocking the social network’s “tre­

mendous potential” as its incoming

owner, on May 13th he told his 94m

followers that the deal was “on hold”. 

Mr Musk says he needs time to

check Twitter’s claim that no more than

5% of its users are bots, robot accounts

used for spamming. Without proof of

this, he said, the deal “cannot move

forward”. Twitter’s ceo, Parag Agrawal,

posted a long explanation of how the

firm came up with the estimate. Mr

Musk replied with a poo emoji.

Identifying bots is hard. They may

well make up more than 5% of Twitter’s

users. But it sounds like a “dog ate the

homework” excuse for cancelling the

$44bn acquisition, in the words of Dan

Ives of Wedbush Securities, an in­

vestment firm. There are other reasons

why Mr Musk may have got cold feet.

The value of tech stocks has tumbled

since the Twitter deal was announced

on April 25th. Mr Musk agreed to pay

$54.20 per share (an apparent reference

to cannabis, which is associated with

the number 420). This week Twitter’s

shares have been trading as low as $37.

Not only may Mr Musk fear overpay­

ing. The acquisition also risks harming

his much bigger interests. Tesla, his

electric­car company and source of

most of his wealth, has lost 29% of its

market value—$305bn—since the Twit­

ter plan was hatched. Investors worry

that the social network could prove a

distraction for Mr Musk, who has in­

dicated that he may serve as its interim

chief executive. It could also harm

Tesla’s business in China, where Twitter

is banned. 

Twitter’s board says it intends to

enforce the acquisition agreement. But

it is in a tight spot. Compelling Mr

Musk to make good on his offer would

mean months in court, with no guaran­

tee of success. There is no obvious

alternative buyer. If the deal falls

through, Twitter’s share price will drop

below $30, thinks Mr Ives, who believes

Mr Musk hopes to use this leverage to

negotiate a lower price. Unlike with his

tweets, the billionaire may yet be able

to edit his contract.

ElonMuskandTwitter

Trick or tweet?

An epic case of buyer’s remorse