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26 September 2019

SoftBank subsidiary acquires Vivint Smart Home in hushed reverse merger

Vivint Smart Home has announced that it is merging with Mosaic Acquisition Corp, itself an acquisition vehicle formed by Mosaic Sponsor and Fortress Mosaic Sponsor, in which the latter is a firm formed by the SoftBank subsidiary Fortress Investment Group. In what seems to be a trend, SoftBank is wrapping itself up in a complex transaction, but one which does at least paint a good picture for the smart home sector.

After the deal, Mosaic Acquisition Corp will be changing its name to Vivint Smart Home Inc, and the pair say that the new entity will have an enterprise value of $5.6bn, a market cap of $3.1bn, with annual revenues of $1.3bn and adjusted EBITDA of $530mn. Vivint will then use proceeds from the transaction to pay off debt and then ‘position the company to further capitalize on growth initiatives,’ which sounds like further acquisitions to our ears. Vivint itself was acquired by the Blackstone Group for $2bn in 2012, and Blackstone was reportedly looking for a $6bn buyer in 2017.

Vivint currently has 1.5mn subscribers in the US and Canada, offering hardware, software, and most importantly the accompanying services. The SHaaS offering has proven popular among its customers, and as a platform, looks very solid. Third-party integrations include Amazon’s Echo and Google’s Home ecosystems, as well as a plethora of other well-known brands. Vivint Smart Home also gave birth to Vivint Solar. Founded in 2011, the wing went public in 2014, and is currently second-place in the US solar market – after Tesla’s decline.

Todd Pedersen, Founder and CEO of Vivint, said “we are excited to partner with Mosaic to unlock the next chapter of the Vivint growth story. We remain committed to our mission of redefining the home experience through intelligently designed, cloud-enabled solutions delivered to every home by people who care. Just as it was in 1999 when I founded this business, to today where we are a multi-billion-dollar enterprise, our customers remain our focus. As the smart home market rapidly expands globally, Vivint is in the early stage of a massive opportunity and is ready to create the future of how we live and interact with our homes.”

SoftBank’s investment prowess is beginning to be questioned in the mainstream press. The recent WeWork farce has led many to question the veracity of the $97bn first Vision Fund, especially after the Uber IPO valuation debacle. Some 80 companies have received investments from the project, but with WeWork and Uber the most high-profile investments, the brand has taken a bit of a battering.

When SoftBank invested in WeWork, it was valued at $47bn. Rumors began trickling out that things were not well in the run up to the IPO, and the valuation was shifted down to the $20bn range. The IPO was then delayed, due to the scrutiny of the financials, and now the CEO has been booted. To this end, it looks like SoftBank can’t do due diligence properly, doesn’t understand Silicon Valley particularly well, or is just a whole lot more optimistic about the potential payoff than the wider financial community.

For companies that received investments from the Vision Fund that have actually completed the IPO, Uber is down around 30% from the filing price, with Slack down around 25%. Of the six total that have filed, only Guardant Health and 10X Genomics are above the IPO price.

According to the Financial Times’ digging, the public statements from the Vision Fund say that things are going well – posting a net return of 29%. With SoftBank having ‘only’ chipped in $33bn, the majority of the rest of the fund stems from Saudi Arabian ($45bn) and United Arab Emirates ($15bn) government investments and a few much smaller stakes. These Arabic countries are wary about the future of their national finances, given volatility in the oil market and the rise of renewables, and so the Vision Fund could be a vehicle to secure their futures.

However, if the Vision Fund is investing too late and whiffing the valuations, the majority investors are likely going to start getting irritated. Sure, a 29% return is good compared to government bonds, but as the Vision Fund is the one doing the valuations, on which the net returns are based, there is going to be some very valid questioning about the leadership running the show. If you look at the climb-downs in Uber and Slack, then it might well be the case that the fund is running at a negative return.

Of course, there’s a new Vision Fund, in which SoftBank has invested $38bn, with the other $70bn coming from Apple, Foxconn, Microsoft, Standard Chartered, Kazakhstan’s National Investment Corp., some Japanese banks, and some major Taiwanese investors, according to Nikkei Asian Review. This lineup isn’t confirmed yet, and with the tide turning, it will be interesting to see if any of these potential investors get cold feet.

The two funds’ use of preferred equity is also drawing concern from the investment community. The Wall Street Journal has done some investigating, and cites a report from Astris Advisory Japan that estimates 30% of the Vision Fund 1 is tied up in Uber, WeWork, and Didi Chuxing. If that is the case, then things could go south very quickly.

SoftBank itself has a colossal $160bn in combined debt, which is a cloud hanging over the company that makes many in the financial community twitchy. To some extent, successful Vision Funds would have alleviated that pressure on the company, but if the investment vehicles fail, it could be enough to bring the company down.

As returns from the first fund are meant to pay for SoftBank’s stake in the second fund, failure here would scupper the second. SoftBank Group shares have also taken a battering, trading at 4,441 JPY currently, down from a 52-week high of 6,045 JPY (down around 26.5%). Its 26% stake in Alibaba could be a savior, but offloading something worth $101bn is not exactly an easy task.