Moody's - Softbank's New Acquisitions Heighten Operational Risks
SoftBank's two latest acquisitions for an estimated total of USD2.5 billion will only marginally increase its debt and reduce liquidity but will, add to the transformation and operational risks, in the opinion of the Moody's debt agency.
SoftBank faces in integrating and managing what are now three large acquisitions -- Sprint Communications, Brightstar and Supercell. The SoftBank management team has a long and successful track record of acquiring much larger enterprises, improving operating performance and integrating them into the larger SoftBank group. In several instances, most meaningfully the acquisition of Vodafone K.K., the acquisition was transformational.
With these three acquisitions the company is embarking on a new and more aggressive strategy in several ways. The acquisitions are located and undertake most of their business outside of Japan adding a cross cultural aspect to integration and understanding. While the mobile phone business in the US is similar to that in Japan, Brightstar, as a distributor and logistics company, will be a new business model to be understood and integrated into the SoftBank group. In addition, it adds Latin America, where most of Brightstar's earnings are generated and SoftBank has limited expertise. The Supercell Oy acquisition will enhance the company's content offering but, as are all large acquisitions, an additional integration challenge.
The Brightstar acquisition brings with it the added challenge of the potential for a major shift in the company's customer base. Among the challenges possibly facing Brightstar is its relationship with its current customer base. Brightstar provides services to major mobile phone companies in the USA. The impact on existing customer relationships of Brightstar's new ownership structure (largest owner will be a Sprint, a major competitor in the USA) is potentially negative.
Moody's expects close cooperation from existing management of the two companies and notes long term relationships between the CEO's of SoftBank and Brightstar as a significant benefit in the integration process.
Nevertheless, the combination of these three complex and large acquisitions will test SoftBank's management team.
SoftBank's size and current liquidity dampen the immediate financial impact from the two acquisitions. The combined cost of approximately JPY250 billion (USD2.5 billion) will reduce SoftBank's liquidity and increase leverage but not meaningfully.
Moody's estimates that cash on hand and internally generated cash flow will allow SoftBank to fund the acquisition with cash on hand.
Assuming the full consolidation of Brightstar (existing debt of approximately USD1billion) and Supercell Oy (no debt) and the use of debt to fully fund the acquisitions, SoftBank's total gross debt at June-end 2013 would increase approximately 5%. Moody's estimates the acquisitions will increase Debt/EBITDA coverage by about 0.2x. SoftBank's adjusted Debt/EBITDA as of June 30, 2013 was 3.5x.
Moody's also noted that Brightstar's business consumes significant working capital as part of its normal business operations, and the company's debt balances fluctuate throughout the year.