It may be time for SoftBank to consider a future without Saudi money

Photo: Bloomberg

With the growing backlash against Saudi Arabia over the murder of government critic Jamal Khashoggi, SoftBank Group Corp. faces tough decisions in its relationship with the kingdom.

Founder Masayoshi Son has had particularly close ties to Saudi Arabia ever since now-Crown Prince Mohammed bin Salman agreed to make Saudi’s Public Investment Fund (PIF) the largest investor in SoftBank’s $100 billion Vision Fund. That fund is now the cornerstone of Son’s company as he uses the cash to take major stakes in tech companies such as Uber Technologies Inc. and WeWork Cos.

But the brutal killing has set off a debate over refusing Saudi investment money. Fred Wilson, co-founder of New York-based Union Square Ventures, wrote a widely cited post this week that called on venture firms to reexamine where they get cash. “Not all money is the same. The people that come with it and who are behind it matter,” he wrote.

Chris Lane, an analyst at Sanford C. Bernstein & Co., has begun to work through the worst case scenarios for SoftBank and its relationship with the Saudis. He thinks it’s likely the collaboration will continue — but says it’s also possible it will end altogether.

“As the shocking news regarding the death of Jamal Khashoggi has come to light, we expect a backlash against companies seen as taking Saudi money,” Lane wrote in a report Thursday. “Even though investments are made by the Vision Fund (not the PIF), the same Millennials who are the target market for WeWork offices and Uber rides are not likely to make a distinction.”

Lane has been a bull on SoftBank since he initiated coverage last year and still advocates buying the stock. He has a 12-month price target of 13,500 yen, compared with 8,800 yen at the close in Tokyo on Thursday. He calls the Vision Fund a “new economic engine” for the company, but warns that Khashoggi’s murder “has suddenly put the outlook for the Vision Fund in doubt.”

He figures the fallout could cost SoftBank about $20 billion to $40 billion. His calculation is this: Under the best-case scenario, Son would raise a new Vision Fund every two to three years. Assuming two successive $100 billion funds and a 15 percent annual return rate, Lane estimates the Vision Fund’s net present value at $37 billion. A 20 percent return would take the value to $68 billion.

But there may not be any more Vision Funds. If only the existing one is deployed, the value is reduced to $17 billion and $32 billion, respectively. Lane also thinks it’s possible that SoftBank won’t even take all the money that the PIF has pledged for the first fund. If the size of first Vision Fund is only $75 billion, its net present value would fall to $14 billion to $26 billion, depending on the returns. SoftBank’s current market cap is about $86 billion.

Lane expects SoftBank to have a pause in cutting major deals for three to six months and then will likely take in more Saudi capital. Still, Son may be able to raise money without the Saudis — his current backers also include Apple Inc. and Qualcomm Inc. Lane figures SoftBank could end up pulling together a number of smaller funds of about $50 billion.

“If SoftBank demonstrates that the model works and that the investments they made are value creating, they will have no difficulty finding money,” he said in a telephone interview. “The whole world wants to make money.”

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Bloomberg