Dating SoftBank's Telco Means Accepting Some Quirks

(Bloomberg Opinion) -- Investors in Asia tech, media and telecoms have had quite a year flirting with the hippest startups.

Xiaomi Corp. and Meituan Dianping were the coolest cats at the IPO party, and everyone wanted in on the action despite knowing better. In today's uncertain times fund managers may well be taking the same philosophy to investment as they did to being young and single: “I love dating them, but I'd never marry them.”

If Xiaomi and Meituan are the exes you knew were a mistake, the $21 billion telecom IPO of Softbank Group Corp.'s Japanese telecoms operator looks that stable partner you can take home for the holidays. The new company (confusingly named Softbank Corp.) is, after all, a telco.

Investors wanting to check up on potential IPO matches can go one up on even Tinder, by reading the prospectus.

SoftBank's 294-page offer document includes all the usual caveats you'd expect from a self-flagellating dating profile. They're included as a kind of get-out-of-jail free card (literally) for the bankers and executives who are pitching the deal.

Under the title Risk Factors, listing documents tend to outline all the things that could go wrong – intense competition, legal challenges, meteors that could wipe out the planet – then throw in boilerplate language elsewhere in the prospectus that puts the onus back on the punter:

Prospective investors should read the following discussion of our financial condition and results of operations together with such financial statements and the notes to such statements included elsewhere herein.

For SoftBank, this serves as an enlightening background check. Revenue climbed 4 percent over the past two years while net income has advanced 1.6 percent. Dive into those notes, however, and you'll see that what really helped advance the bottom line was a 6.2 percent fall in income taxes due to a cut in the tax rate and a drop in deferred tax payments.

Elsewhere, a 78-basis-point drop in operating margin from two years prior would have been 12 points worse if not for a 4 billion yen ($35 million) gain from the lower-than-expected cost of migrating users to new spectrum. That particular detail is buried 229 pages in. The notes also show that the main reason Softbank Corp. managed to stave off an even larger deterioration in operating margin was through an 8 percent cut in sales commissions and promotions, rather than any solid expansion in the top line.

A quick glance at the balance sheet over the past six months looks positively exciting, but requires closer inspection. 

Assets climbed almost 10 percent while liabilities remained almost unchanged. As a result, total equity climbed 67 percent. It's not until you get to page 285 that you learn what's behind a large chunk of that expansion: SoftBank Corp. made a 221 billion yen purchase of shares in Yahoo Japan Corp. from Altaba (Yahoo's U.S. holding company) as part of a complex tender offer with Yahoo Japan. 

Given that the season of summer IPO flings is over, investors may well find SoftBank Corp.'s proposition just a little more palatable. But they ought to remember that even a stable partner has its quirks.

Okay, no mention of meteors, but almost everything else is in there

To contact the editor responsible for this story: David Fickling at dfickling@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

©2018 Bloomberg L.P.