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The sale of SoftBank Group marks the end of what has been a successful investment, generating a Yen total return of +31%, with a weighted holding period of a little under a year compared to a TOPIX return of +12%. We initiated our position in February 2020, before adding to it during the COVID-sell-off, following shareholder pressure to increase board independence, improve disclosure and address the severe undervaluation. We added to this pressure, sending letters to the Board in March and August last year. Shortly after, the Company announced proactive measures to address its issues. More recently, the company’s progress began to backslide after conflicts of interests were raised when SoftBank’s CEO, Masayoshi Son, needlessly took a minority stake in an asset management vehicle set up to manage SoftBank’s cash and disappointingly ceased buying back shares. Along with a narrower discount than our average purchase price and exposure to China regulatory risk, we felt the investment case had deteriorated from when we first made our purchase and that SoftBank no longer warranted a position in the portfolio.

SoftBank’s share price woes were driven by weak China sentiment, as its investment in Alibaba suffered from concerns over China’s stricter regulatory stance, and a disappointing absence of buybacks despite a widening discount.

SoftBank’s NAV fell -14% over the month, driven in the main by a fall in Alibaba’s share price, which has been affected by the Chinese government’s crackdown on consumer technology companies.

During the month, we fully exited the last of the position, having previously trimmed it in January and February of this year. Over the relatively short holding period (18 months from the first purchase), AGT earned a multiple on investment cost of 1.43x and an IRR of 51% in JPY terms (1.40x and 48% in GBP). Three-quarters of these returns came from discount tightening, as we added to the holding at discounts in excess of 75% during the height of the March 2020 sell-off.

SoftBank’s share price fell, as its investment in Alibaba suffered from concerns over China’s stricter regulatory stance. Over the month we exited the position, which had already been trimmed earlier in the year. This marks the end of what has been a successful investment, generating a Yen total return of +31%, in a little under a year compared to a TOPIX return of just +12%.

SoftBank Group (-57bps) and Konishi (-52bps) were the largest detractors. SoftBank suffering from investor disappointment by not continuing its buyback program and Konishi on a lacklustre profit outlook.

SoftBank’s strong performance over the month (share price +22% in JPY) was driven primarily by a significant tightening in the discount. We initiated a position in SoftBank in February 2020 and added to the position at discounts in excess of 75% during the following month’s market rout. Since that date, SoftBank has undertaken a series of transformative actions, including: (1) realising JPY5.5 trillion through asset sales; (2) conducting a JPY2.0 trillion NAV-accretive buyback, with plans for another JPY0.5 trillion; (3) reducing gearing; (4) improving corporate governance through the appointment of two new independent directors; and (5) enhancing transparency over the Vision Fund. Successful IPOs from the Vision Fund (notably Doordash and, after month-end, Korean e-commerce play Coupang) have boosted its track record and, arguably as importantly in terms of Softbank’s discount, helped shift the narrative around the fund and management’s investing prowess.

The market has reacted well to these actions, with SoftBank now trading on a discount of 27% to our estimated NAV (at the time of writing). Reflecting the tighter discount and associated reduced upside, and notwithstanding a long pipeline of prospective IPOs from the Vision Fund, we have reduced Softbank’s weight in AGT by approximately half. To date, the investment has generated an IRR of +76% and a multiple on cost of 1.64x.

SoftBank Group contributed 90bps to returns, on account of its discount narrowing from 56% to 41%, and although our estimated net asset value fell by -7%, Softbank’s share price still rose by +25%. SoftBank Group has proved to be an excellent investment for AJOT, and a prime example of the returns available from successful engagement. During the onslaught from the COVID-induced March sell off when Softbank’s discount widened to an astonishing 76%, and its share price fell by over 50%, SoftBank, with pressure from shareholders, announced that it would sell assets and fund a buyback for almost a third of its outstanding shares. Since then, it has taken further actions to narrow the discount including increased board independence, improved transparency, and asset sales.

SoftBank contributed 61bps to returns in December, as a -4% fall in NAV was more than offset by a tightening discount (49% to 41%), resulting in a share price return of +11%. SoftBank’s largest underlying holding, Alibaba (64% of NAV) declined -12% over the month, reflecting investors’ worries that the Chinese Communist Party would further sanction Alibaba and its financial subsidiary, Ant Group, as well as worries that the US would add Alibaba to a list of “banned” stocks. Although the SoftBank investment is relatively young (initiated Feb-20), it has been a highly successful one to date. Our initial thesis has played out with large-scale asset disposals used to fund a large share buyback programme and reduce debt. There have also been some positive changes in the company’s corporate governance with a growing proportion of the Board made up of independent directors and, despite some further governance mis-steps along the way, we have been pleasantly surprised at the extent to which management has listened to and addressed at least some of our concerns in this area. The share price response to these changes has been positive, up 3x since the March lows where we added to our holding with the discount tightening from a record 76% to 37% at the time of writing. Over the lifetime of the investment, initiated just before COVID roiled global markets, AGT has earned a +71% IRR and a 1.55x multiple on cost (same in JPY and GBP). We have trimmed the position of late, reflecting the tighter discount and several attractive opportunities elsewhere competing for capital.

Softbank has been a strong performer since March. Whilst it was a small detractor this month, we are encouraged by developments at the company. At the end of the month it was announced that SoftBank Group was reducing its stake in telecom company SoftBank Corp, hoping to raise approximately $13bn. This takes the total amount of capital raised from asset disposals above the original target, to approximately $53bn. With the company having 13% more shares to buyback, and trading at a 58% discount, we do not foresee the discount remaining this wide in 12 months’ time.

SoftBank Group was the largest contributor to returns over the month, adding 85 basis point (‘bps’) as its share price rose +13%, driven by a rising NAV (+6%) and the discount narrowing to 55%. We initiated a position in SoftBank – a £90 billion Japanese holding company whose key assets include stakes in Alibaba, SoftBank Corp (a Japanese telco), the Vision Fund, Arm Holdings, and T-Mobile US – in February 2020. As the coronavirus pandemic unfolded, SoftBank’s discount widened at one point to an eye-popping 76%, and we took advantage of that opportunity to add to the position at wider discount levels, such that SoftBank is now AGT’s third-largest individual holding.

We have discussed SoftBank at length in previous newsletters (see here and here). As a quick recap, our initial thesis was based on the presence of activist investor Elliott Advisors on the shareholder register, who we believed would catalyse long-awaited changes in capital allocation and governance. That thesis received swift vindication in March, with SoftBank announcing JPY4.3 trillion of planned asset sales – with the proceeds being used to reduce debt and fund buybacks – as well as appointing two new independent directors and plans to enhance the transparency of the Vision Fund.

Since then, SoftBank has realised JPY2.2 trillion of asset sales through the partial disposal of its stake in T-Mobile US and has completed JPY600 billion of buybacks to date, with a commitment to buy back another near-JPY2.0 trillion worth of shares. The market reacted positively to this news, with the share price recovering +130% from its March lows. We believe that, despite the strong gains, SoftBank still represents exceptional value, a claim which we buttress with two observations. Firstly, the average discount of 40-50% that the market has applied to SoftBank in the past is likely no longer appropriate, given that it has shown itself willing to reduce leverage, improve capital allocation and embrace higher norms of corporate governance. Secondly, ongoing share buybacks generate risk-free, immediate, and certain NAV accretion for remaining shareholders. We estimate that the full buyback programme would generate NAV accretion of +10%. As such, we continue to see significant upside in SoftBank’s shares.

SoftBank – New Position

Being the third largest contributor to returns over the quarter, it would be remiss not to mention our relatively new investment in Softbank. Furthermore, SoftBank may stand out to our investors, from the fact that it has been plagued by scandal in recent times – from the WeWork debacle, to the attempted firing of the Arm China CEO and the disappointment of the much-publicised Vision Fund.

We have spent much time deliberating its inclusion. SoftBank has been a stock that we have followed for many years, and in the past we have invested in it for short periods in small size for our Global strategies. We know the investment case well but had felt for a long time that there was a lack of meaningful catalysts to narrow SoftBank’s staggeringly wide discount to NAV. This changed when, in February, deep-pocketed activist Elliott Advisors announced they had taken a stake and were calling for a buyback, improved transparency, and better governance.

The premise of AJOT is to take advantage of changing attitudes towards shareholders in Japan and inefficient capital allocations. In this respect, SoftBank fitted into AJOT’s portfolio well, despite its large size. With management under pressure from an activist shareholder, the media, and other shareholders, we built a mid-sized position and wrote to the company to reinforce Elliot’s message with which we wholeheartedly agreed.

Subsequently as SoftBank’s share price fell -53% from Y5,750 to Y2,690 amidst the Coronavirus outbreak, SoftBank announced a 7% buyback, followed by a thumping commitment to monetise $41bn of assets and buyback a further 30% of shares. Alongside this SoftBank announced new independent directors to its board and has improved the transparency of the Vision Fund.

This was welcome news to investors, and to the 7th July, the shares have bounced +130% from their March low (we took the opportunity to add over a third to our initial position, at an average price 28% lower than our original purchase price), and now trade 8% above their pre-COVID levels. On a 55% discount, with improving governance, greater transparency and 17% of shares left to buyback, we still see upside.

SoftBank Group contributed 125bps to returns, driven primarily by a tightening of the discount from 66% to
58%. Share price returns were +22%. We have discussed SoftBank at length in previous newsletters (see here and
here). April’s strong performance reflects both a recovery in global equity markets following the coronavirusrelated
sell-off, as well as the market’s assessment of SoftBank’s recent transformative announcements. To wit,
SoftBank has announced JPY4.3 trillion of asset sales, the proceeds of which will finance debt reductions and
two separate buyback programmes which, together, total JPY2.5 trillion, or 26% of outstanding shares at the
current share price.

At the wide discount levels we are observing now, the NAV accretion from buybacks for remaining shareholders
is highly attractive: should the buyback programme be conducted at an average discount of (say) 50%, we
estimate that NAV per share growth would be in the order of +14%. This is equivalent to a 127% return on invested
capital which, given that the accretion is risk-free, immediate, and mathematically certain, makes it a highly
attractive investment proposition relative to almost any other opportunity SoftBank might consider.

Last month, we wrote about a newly initiated position in SoftBank (5% of AGT’s NAV), with the investment
thesis predicated on a wide discount (60% at the time of writing) and the presence of activist investor Elliott
on the register, which we believed could spur SoftBank to address shareholders’ concerns. This hypothesis
was vindicated during the month, with SoftBank making two major announcements: the first for a buyback of
JPY500 billion (6% of market cap); and the second, JPY4.3 trillion of planned asset sales, with the proceeds
being used to reduce debt and to fund an additional buyback of JPY2 trillion (22% of market cap, or 28% in
total). Buying back a large percentage of outstanding shares at a wide discount will be highly accretive for
remaining shareholders – we estimate that, if the buyback were conducted at the current share price and
discount, NAV per share would increase by +23%. Since the announcement, approximately five million shares
have been bought back, or 1% of the total planned programme.

AGT initiated a new position in Softbank Group, which now accounts for 4.3% of NAV, making it a top ten position in the portfolio. Softbank is a Japanese holding company whose main assets include Alibaba (59% of NAV), the Chinese e-commerce giant; Softbank Corp (19%), a domestic Japanese telecoms business; Sprint Corp (15%) a US telecoms business; the Softbank Vision Fund (11%), a portfolio of early-stage, disruptive VC companies; and ARM (12%), the UK-based chip manufacturer. Softbank has been very much in the spotlight of late, following its involvement in the WeWork debacle – an issue which, among others, has weighed on the share price, leading to an estimated discount of 60% to NAV. The negative commentary around the Vison Fund, while understandable, is far out of proportion to its weight in Softbank’s NAV. We believe there are several levers to pull to enhance value and reduce the discount, including: reducing stakes in Alibaba or Softbank Corp in order to fund NAV-accretive buybacks; and enhancing transparency over the portfolio, particularly with regards to the Vision Fund, which many investors perceive as a ‘black box’.

We have been invested in Softbank in the past and follow the company closely. While we have long thought the discount attractive and very “solvable”, it has been hard to identify a catalyst for a re-rating. In that respect, the investment by Elliot Advisors, a deep-pocketed activist, is a potential game-changer. Following the month end, Softbank announced a JPY500bn share buyback programme, equivalent to 6% of market value.