BY LIAM PROUD

Masayoshi Son’s SoftBank Group is worth significantly less than the sum of its parts. For an activist investor with plenty of cash and the stomach for a fight, it could be the trade of a lifetime.

Son’s $82 billion tech-to-telecom conglomerate ticks the boxes for pushy shareholders like Dan Loeb’s Third Point Management or Paul Singer’s Elliott Management. There’s poor governance: Son is both chief executive and chairman and makes investments in cash-burning companies like WeWork partly based on his ability to “feel the force”. Performance is weak too. SoftBank shares have returned minus 15% over the past six months, including dividends.

The result is that Son’s company trades at a huge discount to its theoretical asset value. It owns Alibaba shares worth $136 billion. Chipmaker Arm’s value is probably $22 billion, using the price before Son bought it in 2016. Listed stakes in SoftBank’s eponymous Japanese telecom unit and U.S. operator Sprint are worth $19 billion and $43 billion, respectively. Finally, SoftBank touts $36 billion of mostly private holdings, including its share in the Saudi-backed Vision Fund. Add everything up, deduct debt, and SoftBank’s equity should be worth $215 billion – 161% more than its current market value.

An activist-led breakup would help close the gap. SoftBank could start by handing Arm, Sprint and the Alibaba stake to shareholders. The latter could admittedly be tricky. As Yahoo discovered, it’s hard to realise the value of shares in the Chinese e-commerce giant without triggering a massive tax bill. Still, the potential rewards outweigh the costs.

Son’s 22% stake, based on information on the company’s website, is a big obstacle to forcing change. Major corporate decisions at SoftBank require the support of two-thirds of shareholders. If, say, three-quarters of them turn up to vote, Son only needs the support of investors representing 3% of the company to veto a motion. To overcome that hurdle an activist would either need to acquire a huge stake or rely on widespread support from fellow shareholders.

A protagonist would not be short of potential allies, though. Investors including Capital Group and Tiger Global Management privately criticised SoftBank’s Vision Fund losses and governance, the Wall Street Journal reported. In 2020, an activist could tap into that dissatisfaction to make a killing.

First published Dec. 10, 2019

IMAGE: REUTERS/Kim Kyung-Hoon

BY PETE SWEENEY

China’s Tencent is set for unwanted attention overseas. Its WeChat app, with over 1 billion users, is indispensable to life and business in the People’s Republic, and plays an important role in Beijing’s campaign to monitor and influence Chinese people abroad. The debate over containing it will test Western commitment to free information flow.

The Hong Kong-listed company looks ripe for a session on the griddle. ByteDance, owner of the TikTok video app, is already under investigation in the United States. But if TikTok is a risk, WeChat is too. It is obligated by its government to share user data, plus censor conversations and news. It has flown under the radar because it has few non-Chinese users. This is unlikely to last.

The app is already under fire in Australia, which has around half a million residents born in China. Politicians there are nervous about Chinese meddling in their political system. The Labor Party recently alleged misleading articles describing their policies on immigration and gay rights were disseminated over WeChat – similar to how Facebook was criticised after the U.S. presidential election.

The $461 billion company is the largest constituent of the Hang Seng Composite index, and the second-largest member of the MSCI China Index. While China remains its main market, revenue in other countries from advertising and payments could be at risk. It may be forced to divest stakes in U.S. game studios, including a 40% piece of Epic Games HSBC estimates to be worth $6 billion, or be unable to co-produce films, as it did with “Wonder Woman” and “Venom”.

But WeChat could also present a challenge that previous targets of U.S. ire, like telecom-equipment maker Huawei Technologies, did not: how to block the flow of data. Authorities could tell Tencent to stop transmitting anything back to China, or to store data locally. The most extreme measure would be to block WeChat outright, the way Beijing blocks Facebook.

WeChat is media, not message. But any of the above moves would grease the slippery slope Western societies are already easing on to. With an election around the corner, 40% of Americans believe the government should restrict false information online, per Pew Research Center polling. As Europeans and North Americans harden physical borders, the idea of them creating their own versions of the Great Firewall seems less far-fetched.

First published Dec. 20, 2019

IMAGE: REUTERS/Bobby Yip

BY ANNA SZYMANSKI

Sovereign debt’s bad boy is back. Argentina, the eight-time defaulter, is on the hook for around $100 billion of hard currency debt held in private hands, just part of its hefty borrowings. The International Monetary Fund may complicate new President Alberto Fernandez’s plans for a quick debt fix, with wonky new bond features making the outcome even chancier than usual.

The dwindling liquid cash reported by the country’s treasury won’t even cover next year’s roughly $10 billion in private-lender interest, let alone principal. The Fernandez administration, which took office on Dec. 10, has signaled it prefers a so-called reprofiling to anything more drastic. That normally means maturities would be pushed out a few years, but interest rates and principal amounts due would be unchanged.

The IMF may nix this. The fund gave Argentina a $57 billion credit facility in 2018. No rejig of government debt will happen without its agreement. And its debt-sustainability analysis is unlikely to deem this a simple liquidity issue, especially factoring in the debtor’s history.

So a harsher restructuring is more likely. Citigroup has suggested that private lenders ought to be the biggest losers, with some interest payments cut by about 65% and maturities kicked out by around 10 years. Markets are also gloomy. Argentina’s benchmark U.S. dollar bond maturing in 2028 was trading at around 40 cents on the dollar in early December.

Further drama might come from a seemingly boring source: new legal language. Argentina added so-called single-limb collective-action clauses to recently issued debt. These force owners of specific bonds to accept a deal approved in a vote by 75% of holders of all issued bonds, making it harder for a small group of creditors to hold out, as Elliott Management and a few others famously did last time around. But a related clause says a deal must be “uniformly applicable” to all parties, and this can be interpreted in many ways.

Finally, the so-called pari passu clause – the boogeyman of Argentina’s last restructuring, a provision traditionally understood to give different bonds equal legal ranking – could even become an issue again, with new clarifying language apt to be tested in U.S. courts. The only certainty is that the outcome of the country’s likely debt do-over will, once again, change the wider sovereign debt landscape.

First published Jan. 3, 2020

IMAGE: REUTERS/Agustin Marcarian

BY SWAHA PATTANAIK

Christine Lagarde has given a masterclass in diplomacy since taking the helm of the European Central Bank in November. But even her considerable peace-making skills will be challenged in the coming year. Disagreements will erupt in 2020 between rate setters who are fed up of ultra-loose policies and those who are convinced that the euro zone economy needs more help.

The discord will be over a big ECB strategy review that will, among other things, look at how the central bank’s treasured price stability mandate is defined. Unlike, say, Britain, where this definition is spelt out by politicians as an inflation rate of 2% with some margin of error, the ECB can set – and move – its own goalposts. Since 2003, the central bank has interpreted price stability as meaning inflation that is close to but below 2%. Before then, it simply aimed for less than 2%.

The review that led to the change didn’t cause much in the way of ructions. But this time will be different. How the mandate is defined will determine how loose monetary policy will be in the future. Those who oppose sub-zero rates or asset purchases may therefore back definitions that would strengthen their case.

For example, Austrian central bank chief Robert Holzmann has expressed a preference for a lower inflation target, of 1.5%. That would make it harder to justify ultra-easy monetary policy. So would a switch to an alternative measure of price pressures that includes owner-occupied housing costs, since the inflation rate that is being targeted would be higher. Or the ECB could focus on actual price levels, rather than the annual rate of change. In this case, a protracted period of weak inflation would require monetary policy to remain looser until the undershoot was eliminated. Focusing purely on core inflation, which excludes volatile food and energy costs, would also militate for easier policy.

A major change could destabilise the euro zone. A shift towards tighter monetary policy could cause investors to sell the debt of weaker countries, like Italy. But a looser framework could infuriate savers in northern Europe. With so much at stake, the battle is likely to be bitter and played out in public.

First published Dec. 11, 2019

IMAGE: REUTERS/Francois Lenoir

BY LIAM PROUD

European Competition Commissioner Margrethe Vestager will in 2020 swap her sledgehammer for a scalpel. A new, more surgical approach to antitrust regulation could finally make it easier for Alphabet-owned Google and Facebook’s rivals to compete with these behemoths.

The Dane has yet to really earn her reputation as Big Tech’s slayer-in-chief, despite slapping 8 billion euros worth of fines on Google. Facebook got off with a 110 million euro charge for providing misleading information about its WhatsApp acquisition. Amazon.com has been largely unscathed, while Vestager’s tilt at Apple was mostly about taxes.

She certainly hasn’t dented their share prices. These four companies’ combined market capitalisation has increased around 150% to $3.5 trillion in the five years since Vestager’s term started. Google still processes almost all web searches in Europe. It and Facebook suck up about three-quarters of digital ad spending in the bloc’s five largest economies, eMarketer calculates. Apple’s App Store and Google Play control the discovery and distribution of mobile applications.

Such dominance is sustained by so-called network effects, or self-perpetuating advantages that make it hard for others to compete. A budding Instagram competitor would struggle to get off the ground, since early adopters of a newbie could no longer interact with friends who stayed on the Facebook-owned site. It’s the same for online marketplaces such has Amazon, or app stores. Meanwhile, Google’s search algorithms get better the more they are used. Dominance begets ever greater dominance.

Vestager, now starting her second term in the job, could break the loop by introducing what antitrust wonks call interoperability – basically, shared technical standards that apply across competing services. As with email, users of different social networks could seamlessly interact and move their data around. Rival digital-marketing companies could slot advertisements on to Google’s web pages, allowing them to undercut the search giant’s ad prices. Entrepreneurs could build rival app stores which work on Apple’s phones.

True, hammering out details will be tricky. But the mobile-phone sector shows that industry-wide technical standards are possible. Similarly, British banks now build their IT systems so that customers’ accounts interact with third-party apps. Forcing Big Tech to do something similar might feel less satisfying than a huge fine. But it would give Vestager a better chance of breaking their stranglehold.

First published Dec. 20, 2019

IMAGE: REUTERS/Francois Lenoir