SoftBank: straining at a whale

Japanese tech group is just a big hedge fund, despite its public listing and retail investor base. Photo / AP

Lex COMMENT

SoftBank boss Masayoshi Son must have hoped to win back investor trust with proceeds from aggressive bets on equity derivatives. Instead, a US$30 billion ($44.8b) notional exposure to US tech stocks has underlined how poorly governed and financially opaque the Japanese tech group is. This is just a big hedge fund, despite its public listing and retail investor base.

Cynics always assumed derivatives trades gave SoftBank market risks quite different from those implied by shareholdings in companies such as Alibaba. The scale of the difference is the main surprise. SoftBank's underlying stakes in Amazon, Alphabet, Microsoft and Tesla are worth just US$2b. That is less than a tenth of SoftBank's position in equity call options — contracts that typically allow the purchaser to buy shares later at a fixed price.

The US$4b in options premiums paid by SoftBank are hefty, even if they were financed with debt and have yielded a US$4b paper profit. The business is capitalised at US$112b. Such trades fuel volatility. SoftBank's counter parties might, for example, have to buy tech stocks to hedge their own positions.

Derivatives traders, pleased to know the identity of the "whale" investor, are now wondering whether the options are "out of the money". If so, SoftBank could not exercise them for an immediate profit. That would leave Son doubly exposed to any steep sell-off in US tech shares. High valuations, including Tesla at 900 times forward earnings, mean this is a real danger.

Conservative Japanese retail investors, who own nearly a third of SoftBank, are rattled by the trades, as reflected in a 7 per cent drop in the group's shares on Monday. The debacle of the chaotic US shared workspace group WeWork had already cast doubt on Son's judgment.

He remains as hungry for risk as any pre-crisis Wall Street wheeler-dealer, it appears. Shareholders should read SoftBank's results — a mish-mash of valuation swings and extracts from investee company numbers — with the scepticism that applies to any investor letter from a private hedge fund.

Coronavirus has speeded up the tech transition of which Son is one prominent prophet. But gains in the SoftBank share price this year have largely reflected a US$41b asset sale intended to cut debt, improve shareholder value and reduce risks. The business is still worth much less than its own published investments. As an option, SoftBank itself remains permanently out of the money.

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