Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Equity Bottom-Up

Yesterday after the close, a few days after Softbank had announced its FY2016 Q3 earnings (<a href="http://cdn.softbank.jp/en/corp/set/data/irinfo/financials/financial_reports/pdf/2016/softbank_results_2016q3_001.pdf" target="_blank">report</a>, <a href="http://cdn.softbank.jp/en/corp/set/data/irinfo/presentations/results/pdf/2015/softbank_presentation_2015_003_002.pdf" target="_blank">data</a>, <a href="http://cdn.softbank.jp/en/corp/set/data/irinfo/presentations/results/xls/2015/softbank_presentation_2015_003_002.xlsx" target="_blank">xls</a>, <a href="http://cdn.softbank.jp/en/corp/set/data/irinfo/presentations/results/pdf/2015/softbank_presentation_2015_003.pdf" target="_blank">pres</a>, <a href="http://webcast.softbank.jp/en/results/20160210/index.html" target="_blank">webcast</a> (1hr21)), the company announced a resolution to buy back up to 167 million shares for up to 500 billion yen over the next year. Strictly speaking, either constraint is a maximum and the firm cannot buy back a number or yen value of shares (at purchase price) which would cause either bound to be exceeded (under the newly announced authorization). A Nikkei <a href="http://asia.nikkei.com/Business/Companies/SoftBank-to-repurchase-up-to-4.4-bln-of-own-shares-in-biggest-buyback" target="_blank">article</a> points out that the stock is down 37% year-on-year and makes mention of renewed confidence and better results at Sprint. If you do the math, the limit is 14.2% of shares outstanding but at yesterday's closing price of JPY 4400/share would be 113.64mm shares (not 167mm shares) and would be 9.67% of shares outstanding, so it is unlikely that the share buyback will actually be 14.2%. At today's open, it is more like 100mm shares or about 8.5% of shares outstanding, or 5.5% of last 12mos' ADV.This is the first suggestion of significant "two-way" capital policy of Softbank in years. Of course, the stock reacted well, rising 15% in the aftermarket and in the first 30 minutes of trading today, the stock was up 14% at 5000+ yen. This will help the Nikkei 225 today as it is such a large part.  THE SHORT &amp; SWEET<ul><li>This puts Softbank into the company of the other major Japanese telcos which have each announced multi-hundred billion yen buybacks in the last five years. </li><li>This gives Softbank the chance to buy its own shares at a significant discount to their holdco value (see Smartkarma Holdco model below). </li><li>It provides a signal to the market that Softbank views its shares as too cheap. </li><li>It will likely be far smaller than 14.2% of shares outstanding when done. </li><li>The wording suggests asset sales could fund this buyback. I see major asset sales funding this buyback as highly unlikely. Softbank is very smart as regards its tax structure. It would not seek to sell assets to pay a large tax bill to use the after-tax proceeds to buy its own shares. If it does sell assets it will seek to optimize by rearranging the deck chairs to include capital losses where it can. The wording is designed to show that it will use cash on hand or cash generated from significant operating cash flow (~1.15trln yen in the 12 months through FY2016Q3)</li></ul> AND THERE IS POSSIBLY ANOTHER ANGLE<ul><li>There is an angle here - to be discussed in much more detail in a piece out soon - whereby Softbank would re-arrange the deckchairs of its assets and crossholdings, leading to a reduction of its holdco discount.</li><li>As noted above, Softbank is nothing if not tax-aware. To rearrange this particular set of deckchairs MOST efficiently, Softbank would need to issue shares.</li><li>In order to not dilute Masayoshi Son's holdings excessively, and make most optimal use of the taxation of different transaction modes, it would want to own more of its own shares before issuing new shares. </li><li>And at the time of issuance, it would want its own shares to be at a substantially higher price in order to more optimally use those shares as currency. </li><li>It is kind of a cool potential transaction.</li></ul> Much more detail below the fold for subscribers...

Yesterday after the close, a few days after Softbank had announced its FY2016 Q3 earnings (report, data, xls, pres, webcast (1hr21)), the company announced a resolution to buy back up to 167 million shares for up to 500 billion yen over the next year. Strictly speaking, either constraint is a maximum and the firm cannot buy back a number or yen value of shares (at purchase price) which would cause either bound to be exceeded (under the newly announced authorization). A Nikkei article points out that the stock is down 37% year-on-year and makes mention of renewed confidence and better results at Sprint. If you do the math, the limit is 14.2% of shares outstanding but at yesterday's closing price of JPY 4400/share would be 113.64mm shares (not 167mm shares) and would be 9.67% of shares outstanding, so it is unlikely that the share buyback will actually be 14.2%. At today's open, it is more like 100mm shares or about 8.5% of shares outstanding, or 5.5% of last 12mos' ADV.This is the first suggestion of significant "two-way" capital policy of Softbank in years. Of course, the stock reacted well, rising 15% in the aftermarket and in the first 30 minutes of trading today, the stock was up 14% at 5000+ yen. This will help the Nikkei 225 today as it is such a large part.  THE SHORT &amp; SWEETThis puts Softbank into the company of the other major Japanese telcos which have each announced multi-hundred billion yen buybacks in the last five years. This gives Softbank the chance to buy its own shares at a significant discount to their holdco value (see Smartkarma Holdco model below). It provides a signal to the market that Softbank views its shares as too cheap. It will likely be far smaller than 14.2% of shares outstanding when done. The wording suggests asset sales could fund this buyback. I see major asset sales funding this buyback as highly unlikely. Softbank is very smart as regards its tax structure. It would not seek to sell assets to pay a large tax bill to use the after-tax proceeds to buy its own shares. If it does sell assets it will seek to optimize by rearranging the deck chairs to include capital losses where it can. The wording is designed to show that it will use cash on hand or cash generated from significant operating cash flow (~1.15trln yen in the 12 months through FY2016Q3) AND THERE IS POSSIBLY ANOTHER ANGLEThere is an angle here - to be discussed in much more detail in a piece out soon - whereby Softbank would re-arrange the deckchairs of its assets and crossholdings, leading to a reduction of its holdco discount.As noted above, Softbank is nothing if not tax-aware. To rearrange this particular set of deckchairs MOST efficiently, Softbank would need to issue shares.In order to not dilute Masayoshi Son's holdings excessively, and make most optimal use of the taxation of different transaction modes, it would want to own more of its own shares before issuing new shares. And at the time of issuance, it would want its own shares to be at a substantially higher price in order to more optimally use those shares as currency. It is kind of a cool potential transaction. Much more detail below the fold for subscribers...

Understanding Softbank's Buyback - A Possible Less Obvious Angle

Japan

GungHo Online Entertainment, Inc. develops and distributes Internet games. The Company also develops applications for smartphones.

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Gungho Online Entertainment (3765 JP)

Understanding Softbank's Buyback - A Possible Less Obvious Angle

Yesterday after the close, a few days after Softbank had announced its FY2016 Q3 earnings (report, data, xls, pres, webcast (1hr21)), the company...

Travis Lundy

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