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13 November 2019

Sprint, WeWork and Uber cast dark shadow over Softbank’s 5G plan

Softbank of Japan has been held up as a shining example of how a visionary leader could help an operator diversify beyond the increasingly pressurized business of mobile and web services. Chairman Masayoshi Son has famously set up the massive Vision Fund and invested in companies in many countries and many areas of the hi-tech value chain, with a view to playing in most of the key enablers of next generation digital services, from chips to artificial intelligence.

However, telcos can be over-ambitious when they seek to move out of their comfort zones, and two high profile Softbank investments – in ride sharing firm Uber and shared workspace provider WeWork – have caused a disastrous set of quarterly results for the operator, and perhaps worse, a dip in confidence in its ability to invest fully in 5G.

The operating loss in Softbank’s second fiscal quarter totalled about US$6.5bn and was its first loss in 14 years, with much of the blame placed on the stakes in WeWork and Uber. For the first half of the year, the company was in profit of $3.9bn, but this was half the level of the year-earlier half-year period.

Walter Piecyk and Joe Galone, analysts at Lightshed, wrote in a client note: “The level of distraction at SoftBank must be high at the moment given the meltdown at WeWork”, a factor which is worrying for investors who are focused on the core mobile business, given that Japanese operators will go live with 5G next year. They pointed out that Son was in Saudi Arabia last week, reportedly trying to raise more capital for the second Vision Fund (Gulf area money has been key to the financing of the original fund); while Softbank’s COO Marcelo Claure has taken over the role of executive chairman of WeWork to address the issues. WeWork’s CEO resigned last month after a failed initial public offering (IPO).

Serious damage to the reputation of the Softbank group could affect confidence and therefore ability to invest in 5G and other core growth strategies.

Softbank now reports its financial results in five divisions – Vision Fund and Delta Fund, Softbank itself, its US operator Sprint, its UK chip IP subsidiary ARM, and Brightstar, the handset distributor co-founded by Claure (who ran Sprint before transferring to Softbank headquarters).

Another headache for Softbank, of course, is the risk that majority-owned Sprint will not succeed in the proposed merger with T-Mobile USA. Sprint said that its wireless revenue fell by $453m in the quarter, to $5bn. Although the FCC has approved the TMO/Sprint deal, it passed a merger extension deadline on November 1, with some investors calling for TMO’s majority owner, Deutsche Telekom, to renegotiate the terms because of the fall in Sprint’s value since the original agreement, and the rising cost of the transaction.