Now that we have a value of $32 billion for all of Alibaba Group (see previous post), we might as well look at the sum-of-the-parts or stub valuation of Softbank Corp.
Softbank Corp. owns 32.6% of the Alibaba Group, and that’s worth $10.4 billion or 790 billion yen.
Let’s look at all Softbank’s holdings.
Softbank’s Equity Holdings
Yahoo Japan, 42.6% stake: 559 billion yen
Yahoo Inc., 4% stake: 55.8 billion yen
RenRen Inc., 33.4% stake: 52 billion yen
Alibaba, 32.6% stake: 790 billion yen
All of these holdings together make up a value of 1.46 trillion yen.
Softbank stock closed last night at 2282/share, so the total enterprise value of Softbank is around 3.7 trillion yen. In other words, these equity holdings account for 39% of the total enterprise value of Softbank and around 60% of the total market capitalization of the company.
What does that mean?
The first way to look at it is as a stub trade. Take the away the equity holdings from the value of the total company and see what the rest of the business is worth on a P/E and EV/EBITDA ratio basis. To do this, I deduct the value of the investments from the market capitalization and total enterprise value respectively and then divide it by EPS and EBITDA, both with Yahoo Japan’s contribution excluded (and any equity income).
First, if you deduct 1.46 trillion yen from the enterprise value of 3.7 trillion yen, you have 2.2 trillion yen for Softbank’s mobile phone and telecommunication and other businesses (excluding income generated by the above investments).
EBITDA and net earnings on that basis were 767 billion yen and 230 billion respectively.
This means that excluding the equity investments, Softbank’s telecommunication business is trading for 2.9x EV/EBITDA and 4.6x p/e.
That is pretty cheap, although Softbank’s telecommunication business is not the best in Japan (they do have iPhone/iPad exclusivity now, but that will end soon and people wonder how good Softbank can be after that as they have by far the worst network).
As comparison, NTT Docomo was recently trading at 11.6x p/e and 3.6x EV/EBITDA ratio and KDDI was trading at 4x EV/EBITDA and 9.9x p/e.
For all of these figures, I used the full year 2010 numbers. These valuation figures for Softbank may be way lower if they continue the high growth they have acheived recently.
An important point, however, is that I haven’t deducted taxes on their equity investments. If I apply a 40% tax rate to the above holdings (because most of their value is unrealized profits), the after tax value of their investments would be 876 billion yen. And the respective valuations for the rest of Softbank, their telecommunications business would be 3.7x EV/EBITDA and 7.1x p/e.
So what is Softbank worth?
It really depends on your assumptions, but from the above we know that the investments are worth either 1300 yen/share of Softbank, or 800 yen depending on tax treatment (some people use 20% or 30% discounts to account for taxes and liquidity issues).
From there, you can apply a valuation measure you like for the telecommunications business. For example, if you think 10x p/e is fair, the telecom business is worth 2100 yen per share. Combining that with the gross value of investments gives you 3,400 yen/share value versus the current price of around 2,300 yen/share.
Being more conservative and accounting for taxes, the same figure would be 2,900 yen per share, not too far off where it is trading now.
Using an EV/EBITDA ratio of 5x would give a total value of 300 or 400 yen per share higher than the above.
So What do I think?
This is certainly and interesting play, but so much of the value is based on value of the telecommuncation business. I tend not to like the mobile/telecommunication business because it always seems to me that they have to spend tons of money on capex to keep the network up to date. They look great when they are growing or when they are taking market share, but when that growth period ends, they tend to trade cheaply. And then the competitors price cut each other and it turns into a brutal scene.
I actually don’t know much about the mobile phone/telecommunication business, these are just my impressions.
So although this looks like an interesting opportunity, it is not one of my favorite ideas at the moment.