Alibaba Falls On Report Softbank To Sell Most Of Its Stake

China’s Alibaba dropped to a two-week low after the FT reported that Japan’s troubled bubble-stock incubator. SoftBank Group, is moving to sell the majority of its stake in the Chinese tech giant, the latest sign of long-time China investors lowering their exposure there. Alibaba shares fell as much as 5.2% in Hong Kong on Thursday, erasing about $13 billion of market value.

The liquidity-challenged Japanese technology investor sold more than $7 billion in Alibaba shares this year through prepaid forward contracts, after selling $29 billion last year, according to the FT which added that while the contracts give SoftBank the option to buy the shares back, the group has settled previous deals by handing over the stock.

The sales will reduce the Japanese conglomerate’s ownership of Alibaba to less than 4%, the FT said, citing its analysis of regulatory filings. That’s down from around a 14.6% stake the company said it was slated to hold as of end-September. Softbank once owned about a third of the company spanning from an early $20 million investment in one of venture capital’s most famous bets. Alas, judging by the performing of most of its subsequent investments, it very well may be that the company was a one-hit wonder.

Furthermore, whatever the reason behind the liquidation, it’s clear that SoftBank missed its opportunity to sell near the highs: over the past 14 months, SoftBank brought in an average of $92 a share from the forward sales of 389 million Alibaba shares, the Financial Times said. That value is much less than the company’s all-time high of $317 a share.

As Bloomberg notes, Softbank, which has been pummeled by losses on its startup bets, has said it would prioritize financial discipline before seeking the right time to go on the offensive with investments. Investors are also speculating if the company will launch another buyback program.

“While SBG has made keeping LTV at 25% or less its top priority, we think progress in the monetization of asset holdings would boost the chances of a buyback announcement” said Citibank analyst Mitsunobu Tsuruo in a note to investors.

Here is what some other strategist said in response to the news:

Asymmetric Advisors (Amir Anvarzadeh)

• “Any major buyback seems very unlikely, and if they do they will only concentrate the risks of holding SoftBank shares”
• The news “indicates that SoftBank is raising cash wherever it can; given that a big stake was pledged as collateral against loans I wonder if this sale will go to pay off these loans”
• It also removes risks for SoftBank short-sellers from a potential rebound in Alibaba stock

Bloomberg Intelligence (Sharon Chen)

• SoftBank’s sale “could further weaken its portfolio quality and pressure credit ratings”
• “This increases the importance of listing Arm at a valuation above current book value to meet S&P’s requirement for over 60% of SoftBank’s portfolio to be in listed shares”

Iwai Cosmo Securities (Tomoaki Kawasaki)

• “SoftBank may be selling as they don’t see much profitability” in owning Alibaba due to China regulatory risk
• SoftBank has in the past used Alibaba as a means to promote the value of its shares, so SoftBank’s muted perfomance today may reflect the impact of the reported sale

Alibaba, along with other Chinese tech giants, had come under intense scrutiny from Beijing in recent years, and its shares have tumbled. Last month, the online commerce leader said it plans to split its $240 billion empire into six units that will individually raise funds and explore initial public offerings. 

SoftBank shares were little changed in Tokyo after dropping about 8% this year through Wednesday’s close (SoftBank short interest equaled 4.1% of the free float as of April 11). SoftBank, which in 2019 we dubbed “The Bubble Era’s Short Of The Century” has shouldered billions of dollars of losses on its Vision Fund, which had lifted valuations in startups worldwide with its large bets on hundreds of fledgling companies. It cut staff at its Vision Fund unit last year as it stopped actively chasing new investments. This week, SoftBank said it plans to sell its early-stage venture capital arm SoftBank Ventures Asia Corp., one of the avenues by which it scouted promising startups.

Meanwhile, as Bloomberg reminds us, other long-time China investors have been lowering their exposure in China. Tencent Holdings Ltd. plunged this week on signs that its largest shareholder Prosus NV may extend the selling of the Chinese tech firm’s stock.