While Japan’s traditional consumer electronics industries are seemingly in terminal decline, telco Softbank is making great strides in its bid to become the world’s number one company in mobile communications, a goal set out by its maverick chairman Masayoshi Son, and now looking less crazy than it seemed a year or two ago.
Softbank is little known outside the US and Japan, and it took a traditional Japanese route insofar as it built up its domestic base before embarking on foreign ventures. However, it has now largely fulfilled its earlier ambition of overtaking incumbent operators after a series of bruising, but largely successful battles with the country’s regulators.
So it is set to be far better known round the world, unless the wheels come off spectacularly during a remarkably rapid advance in the telco arena. This advance started gathering momentum with the $21.6bn majority acquisition of Sprint, completed in July 2013. But if the Sprint takeover signaled an escalation in ambition, the company has since set the bar even higher with a strategy that now embraces content and the full range of mobile services on top of infrastructure and basic communications.
The reported $3.4bn bid for DreamWorks has yet to be confirmed but even if it does not happen, there is no chance of Softbank scaling back its strategy, with other similarly aggressive moves into content and production likely to follow.
It would be a natural sequel to Softbank’s $1.5bn acquisition, completed in October 2013, of 51% of Finnish gaming company Supercell, which gave it entry to the rapidly growing global mobile gaming market. This was the firm’s first move into content – in this case just two games, Clash of the Clans and Hay Day, but these had boosted Supercell’s revenue almost ninefold in one year from $101m in 2012 to $892m in 2013.
The price paid by Softbank valued SuperCell at a 3.5 multiple of revenues, but still less than the fivefold bid for DreamWorks, which reflects the premium on high quality video rights. Even though gaming is booming, it is seen as a more volatile market where companies are only as good as their latest creation and can easily implode. By contrast video content as a whole is seen as the future of mobile and so every major player is now getting into it.
One attraction for Softbank of DreamWorks Animation is that 24% of its $749.8m 2013 revenue came from non-film related sales, highlighting the company’s diversification beyond movies into TV, live events, consumer products and online video. It is not that movies are getting less important, but reflects the necessity of having a strong collection of TV rights including live sports, in order to become a major all-round multiplay mobile operator.
For DreamWorks itself, competition had been denting sales and especially profits, which have been hovering around break even recently. Diversification has become necessary, but the company has also come to realize it is not quite strong enough to compete with the Hollywood bighitters. It has therefore been exuding corporate pheromones inviting courtship from a larger suitor in order to gain extra leverage in distribution negotiations and at the very least Softbank has been expressing interest.
This in turn has fuelled speculation over who Softbank will buy if the DreamWorks bid fails, or even in addition. Just this week it has snapped up a 7.5% stake in the Legendary Pictures studio owned by filmmaker Thomas Tull and this could progress into a larger deal in future. Softbank will pay $250m for its stake in the producer of the Godzilla movie, and could increase that investment to $1bn by 2017, according to Bloomberg sources.
The deal will provide Legendary with fresh growth capital and will enhance the Softbank content strategy for its mobile networks with new films and TV shows. Importantly, the companies will also create a joint venture to develop online and mobile services, with a focus on India and China, according to a statement. Softbank is still considering other deals in media and digital technology, said the insiders, clearly alluding to the Dreamworks reports.
Privately owned, Legendary recently agreed a multiyear co-financing and distribution deal with Universal. It financed over half of Godzilla alongside Warner Brothers, also backing successful movies such as Hangover franchise and Dark Knight movies.
What is beyond doubt is Softbank’s ability to buy both these companies in parallel. It has a 32% stake in Chinese Internet firm Alibaba Group worth about $71bn and therefore gained big time from that company’s recent blockbuster IPO on Wall Street.
Ironically Softbank’s shares have slumped by 10% since the IPO despite reaping an immediate $5bn windfall. This was because Softbank’s shares had been elevated by people buying as a proxy investment in Alibaba itself ahead of the float. Now investors can buy shares in Alibaba directly, so the fall in Softbank’s share prices was a natural correction. It is unlikely Softbank’s chief executive Masayoshi Son will be losing much sleep over it.