Japanese Billionaire Son Makes $58B on Alibaba With Buffett-Type Return

With Alibaba Group Holding Ltd. filing to go public, the biggest winner won’t be founder Jack Ma or his fellow executives or even venture capital backers like Silver Lake Management LLC. It’ll be Japan’s Masayoshi Son.

Fourteen years ago, Son’s SoftBank Corp. (9984) started with a $20 million bet on a then-unknown Web portal connecting Chinese manufacturers with overseas buyers. That site evolved into China’s biggest Internet shopping mall and SoftBank’s stake is now estimated to be worth about $58 billion, an exceptional return even by Silicon Valley’s standards.

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The IPO burnishes Son’s reputation as one of the world’s savviest investors and provides more capital to a man on the hunt for deals. After taking control of the U.S. carrier Sprint Corp. last July, Son made no secret of his interest in T-Mobile US Inc. (TMUS) Analysts say he may also pursue European wireless operators or take another look at music labels, after his $8.5 billion bid for Vivendi SA’s Universal Music Group was rebuffed.

“The guy is the Warren Buffett of Asia,” said Greg Tarr, managing partner at seed fund CrossPacific Capital in Palo Alto. “In venture capital, the way we measure success is how much was put in initially and what’s the return. Every now and then you have something worth 500 times, like a Twitter (TWTR) or an Alibaba.”

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Over three decades, Son used borrowed money to transform the software wholesaler he founded in 1981 into a phone company spanning two continents. In Japan, he built a challenger to larger carriers and was first to bring Apple Inc.’s iPhone to the country. He bought Sprint to take on the top players in the U.S., Verizon Communications Inc. (VZ) and AT&T Inc.

Puzzle & Dragons

The 56-year-old also created a venture-capital goliath with investments in more than 1,300 technology businesses. They include Yahoo Japan Corp., the nation’s biggest Web portal, Zynga Inc., creator of smartphone gaming hits FarmVille and Mafia Wars; and GungHo Online Entertainment Inc. (3765), maker of the Puzzle & Dragons game.

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Among other more eclectic stakes: Cheezburger Network, a collection of humor websites, and Buzzfeed Inc., an online compiler of quirky lists like “58 Extremely Disappointing facts about the class of 2018” or “10 Ridiculous Things People do in the Club.”

Son’s biggest bet so far was last year’s $22 billion deal for control of Sprint, which gave SoftBank access to about 50 million U.S. subscribers. Many are just starting to use their phones to watch videos and search the Web — pursuits already popular in Japan.

After the Sprint deal, Son last December sought about $20 billion in bank loans to buy Deutsche Telekom AG’ s 67 percent stake in T-Mobile, the smallest of the four national carriers, people familiar with the matter said at the time.

First Priority

Combining Sprint and T-Mobile would create a bigger No. 3 in the U.S. market.

“The first priority, no matter what, is to settle the U.S. situation,” said Naoshi Nema, an analyst at Cantor Fitzgerald LP in Hong Kong. “They want T-Mobile to get scale.”

Still, a similar attempt by AT&T in 2011 to buy T-Mobile was blocked by regulators, arguing consumers were better off with more choices. For his part, Son argues that he’d lower prices if a deal were allowed to go through. He plans to push forward with a T-Mobile bid, people familiar with the matter said last week.

“He’s not a man that gives up lightly,” said Neil Juggins, a Hong Kong-based analyst at JI Asia Research Ltd. “If it doesn’t happen this time, that doesn’t mean that it’s never going to work. It might be that he keeps going back and going back until the regulators are prepared to listen to him.”

Alibaba Windfall

The billionaire’s patience has paid off with Alibaba, which this week filed for what may be the largest-ever initial public offering ever in the U.S. The offering may raise as much as $20 billion and also allow Yahoo! Inc. (YHOO), its second-largest investor, to sell part of its stake.

With all of Alibaba valued at about $168 billion based on the average estimate from analysts, SoftBank’s 34.4 percent stake is worth $57.8 billion, assuming those shares translate into the same-sized holding in the listed company and there are no conditions on their ownership.

After leading the initial $20 million investment in 2000, SoftBank subsequently bought additional shares and bonds, according to the filing. Matthew Nicholson, a Tokyo-based spokesman for SoftBank, declined to elaborate on the company’s stake.

“He plants the seeds and waits for things to grow,” said Tomoaki Kawasaki, an analyst at Iwai Cosmo Holding Inc. in Tokyo. “Alibaba is a pretty good example.”

Astronomical Debt

Son is set to play a major role in Alibaba after its IPO, with SoftBank guaranteed a board seat, backing the e-commerce company’s partnership and pledging to keep its stake above 30 percent.

While Son has financed his empire with borrowed money — including his $22 billion bid for Sprint and $15 billion deal for Vodafone Group Plc’s Japanese unit in 2006 — the flip-side is a battered credit rating. Moody’s Investors Service and Standard & Poor’s last July cut SoftBank’s rating to junk.

“SoftBank is one of the most leveraged companies in the world.” said Amir Anvarzadeh, manager of Japanese equity sales in Singapore at BGC Partners Inc. “The level of debt is astronomical.”

SoftBank had interest bearing debt of about $90 billion as of March 31, the company said yesterday. Its debt-to-equity ratio is 320 percent, the second-highest among the world’s top 40 telecommunications companies, according to data compiled by Bloomberg.

Eclectic Mix

Peggy Furusaka, a Tokyo-based credit analyst who covers SoftBank for Moody’s, said listing Alibaba would be “credit positive” for the phone company to the extent that it makes it the shares easier to sell.

“If they sell shares and say they’ll use the cash to pay down debt or repay bonds, then — and really only then — will it impact financial ratios,” she said. “It only has significance if the shares are monetized and used to repay debt.”

Should Son fail to overcome regulatory opposition to a T-Mobile deal, there are other options. He could look to buy the second- or third-tier operators in Europe, according to Hideki Yasuda at Tokyo-based Ace Research Institute.

He could also boost his investments in content for mobile devices such as games or music, areas where he’s already shown interest. SoftBank made an $8.5 billion bid for Vivendi SA (VIV)‘s Universal Music Group that was rejected by the French media company, people with knowledge of the proposal said in July.

Supercell, Fitbit

“If he doesn’t get T-Mobile he may look to go with a stack of capabilities rather than just scale,” said Jan Dawson, an analyst with Jackdaw Research in Provo, Utah. “In Japan, SoftBank has been adding digital content and gaming. They could do more there. Content is a key element to control.”

Investments in businesses that complement Son’s wireless operations were part of the strategy last year. He added control of Finnish gamemaker SuperCell Oy for $1.5 billion and U.S. mobile phone distributor Brightstar Corp. for $1.3 billion. SoftBank also has a stake in Fitbit Inc., a maker of high-tech wristbands that tracks exercise and sleep habits.

Whatever is next, the Alibaba IPO provides a tailwind for deal-making, said CrossPacific’s Tarr.

“Anytime you have a big victory like this, people take you more seriously,” CrossPacific Capital’s Tarr said. “He’ll be able to do bigger and bigger deals.”

To contact the reporters on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net; Takashi Amano in 東京 at tamano6@bloomberg.net

To contact the editors responsible for this story: Michael Tighe at mtighe4@bloomberg.net Robert Fenner, Peter Elstrom

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Japanese Billionaire Son Makes $58B on Alibaba With Buffett-Type Return
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