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SoftBank (OTC: SFTBY), the Japanese telecom and tech company, is planning to split into two. The move will allow the two very different businesses that SoftBank has become to operate independently – and allow the separated companies to seek out their best respective growth opportunities.
Shares of SoftBank are down 10% over the last year, as its overseas investments continue to weigh on the company. This includes its big bet on Sprint (NYSE: S), where it’s a majority shareholder. Sprint’s stock is down 30% in the last 12 months and is off 65% since the start of 2014.
Breakup Plan
The plan is to create two separate companies. One will be focused on overseas technology investments and the other on the slow growth telecommunication business.
The SoftBank breakup has been dubbed by the company as a “transformation from a strong Japanese business with global assets, to a global business which will strive to create sustainable growth for the very long-term.”
Japan has struggled to produce enough sizable startups for SoftBank to invest in. Hence, most of SoftBank’s big investments are overseas, including its stakes in Sprint and Alibaba Group (NYSE: BABA). It has a 32% stake in the latter.
Sprint, as mentioned above, has been the real drag for SoftBank of late. Competing with the likes of Verizon (NYSE: VZ) and AT&T (NYSE: T) has proven difficult for Sprint. SoftBank has been funneling money into Sprint to keep it out of bankruptcy. Of note though is that Sprint still owns a lot of spectrum, which could be valuable to another telecom or cable company.
SoftBank also has investments in Snapdeal, Weibo and Groupon (NASDAQ: GRPN). In a way, SoftBank is a bet on a long-term focused venture capital business. The separation will allow the investment business of SoftBank to make even bigger and bolder bets; it plans to invest $100 million to $1 billion in each startup deal.
The domestic telecom business, which makes up the lion’s share of SoftBank’s actual earnings, includes a meaningful stake in Yahoo Japan (OTC: YAHOF), which will remain as part of its domestic business.
As a standalone company, the domestic telecom business won’t have to worry about keeping pace with the faster-growing overseas investments. Instead, it can focus on taking market share and outperforming other Japanese companies. The deal should also bring more transparency to SoftBank’s businesses.
A Greater Shareholder Return Story
The SoftBank breakup announcement comes as the company is looking to shed its recent history of underperformance. Over the last five years, shares of SoftBank are up 35%, while the S&P 500 has surged more than 50%.
SoftBank does pay out a $0.17 dividend each quarter, which equates to a modest 0.65% dividend yield. That doesn’t sound like much, but it helps make SoftBank a solid capital returns story.
Just last month, SoftBank announced a $4.4 billion buyback plan, which is expected to be completed over the next year. That’s good enough to reduce SoftBank’s share count by 14%. Both the amount and relatively quick buyback period were surprises to many investors. The company doesn’t plan on taking on any debt to fund the buyback.
The deal is expected to be done by year-end and will unbind the two very different businesses, allowing each to make big bets on their respective industries. Plus, SoftBank shareholders can still collect a modest dividend and benefit from a robust buyback plan.
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