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.”

Also Read:

SoftBank’s Masayoshi Son goes to Riyadh, skips conference

SoftBank ‘anxiously’ looking at developments in Saudi Arabia, says COO

Bloomberg

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Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.