SoftBank reduces stake in Alibaba, expects  billion in profits

SoftBank reduces stake in Alibaba, expects $34 billion in profits

Masayoshi Son reduces one of the biggest bets in tech history.

SoftBank Group Corp. of the technology investor announced its stake in the Chinese e-commerce company Alibaba Group Holding Ltd. sharply, a move that will preserve SoftBank’s cash position as it weathers a severe downturn.

By selling $22 billion in Alibaba stock, SoftBank is accelerating the split between two companies that were once tied at the waist and symbolized Asia’s tech boom.

Both have hit a rough patch. SoftBank chief executive Mr. Son said this week he regretted a spending spree that resulted in a record $23 billion loss last quarter, while Alibaba, formerly run by Mr. Son’s friend Jack Ma, sold its shares by hundreds Has lost billions of dollars in market value after a technical crackdown by the Chinese government.

SoftBank said its stake in Alibaba is expected to fall to 14.6% by the end of September, down from 23.7% as of June 30. As a result, SoftBank will change its accounting for Alibaba and no longer count part of the Chinese company’s profits as its own. Instead, Alibaba will be just one of hundreds of investments on SoftBank’s books.

The move comes as a result of processing deals SoftBank has entered into with financial institutions using Alibaba stock over the past several years. In those contracts, SoftBank received billions of dollars in cash upfront. It promised its bankers that it would either pay the money back later or give them Alibaba shares to settle the contracts.

The contracts were comparable to someone being given cash at a pawn shop in exchange for the temporary handing over of a gold watch or a pearl necklace. Customers can usually recover their pawned items of value later if they return the cash plus interest, or they can keep the cash if they forfeit the watch or necklace to the pawnbroker.

SoftBank said on Wednesday that it decided to keep the money. By dumping its Alibaba shares, SoftBank said it would “further strengthen our defenses against the difficult market environment” and “relieve concerns about future cash outflows.”

SoftBank announced it will deliver up to 242 million American Depositary Receipts from Alibaba — shares worth $22 billion at Tuesday’s closing price.

Alibaba’s ADRs fell about 1.3% to $90.03 in Wednesday morning trading, lagging a rising broader market.

Mr. Son and Ma’s relationship dates back more than two decades when Mr. Son, already a billionaire tech entrepreneur, hit it off with the Chinese startup founder. In 2000, SoftBank invested $20 million in a stake in Alibaba.

As Alibaba grew into one of China’s dominant internet companies, SoftBank’s holding took on outsized importance, at times accounting for nearly 60% of the Japanese company’s net worth.

Chinese tech stocks, popular with US investors, have plummeted amid the country’s regulatory crackdown on tech companies. WSJ explains some of the new risks investors face when buying shares in companies like Didi or Tencent. Photo Composite: Michelle Inez Simon

Then shares of Alibaba and other Chinese e-commerce leaders fell sharply over the past year after Beijing changed its stance on the industry. The Chinese government imposed fines and launched investigations to force companies to better align themselves with state interests. Mr. Ma disappeared from public view for a while.

Alibaba’s market cap peaked at more than $850 billion in October 2020 and has shrunk dramatically since then. According to FactSet, the e-commerce giant’s market cap was around $240 billion at the close on Tuesday.

Mr. Ma has long served on the board of directors of Mr. Son’s company and vice versa, but those ties ended two years ago, though SoftBank retains a seat on Alibaba’s board for now. And geopolitical tensions between Beijing and the US-led democratic bloc, which includes Japan, have made China links less desirable for many Japanese companies.

The recent sell-off accelerates the previously phased reduction in SoftBank’s stake in Alibaba over the past several years. In late 2014, the year of Alibaba’s record-breaking U.S. IPO, SoftBank reported a stake of more than 32%.

SoftBank said it will “continue to have a good relationship with Alibaba.” Alibaba reported the SoftBank transactions in a Hong Kong exchange filing, but didn’t say what it thought of the SoftBank movement.

SoftBank said it expects to contribute about $34 billion to pre-tax income as a result of its Alibaba stock transactions. Most of that comes from accounting for the remaining Alibaba shares on SoftBank’s books at market value, rather than at a lower value that prevailed long ago.

SoftBank accumulated cash. In its latest financial report released Monday, it said it had a cash position of 4.6 trillion yen at the end of June, equivalent to $34 billion, more than double the 1.8 trillion yen it had for the repayment of its corporate bonds took the next two years.

“We have plenty of cash on hand,” Mr Son said Monday. “We’re beefing up our defenses as promised.”

A key use of SoftBank’s cash has been hefty share buybacks, which have helped support its share price even as the market has fallen. It announced additional buybacks worth up to about $3 billion on Monday.

As of June 30, Alibaba’s stake accounted for about a fifth of SoftBank’s net asset value, SoftBank said.

write to Kosaku Narioka at [email protected]

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