SoftBank Gets Downgraded After WeWork’s $9.5 Billion Rescue

(Bloomberg) -- SoftBank Group Corp. earned only its second Hold rating on Friday after a Jefferies analyst downgraded the Japanese conglomerate for engineering WeWork’s $9.5 billion rescue package.

Analysts covering SoftBank Group Corp. have been nearly unanimous in recommending investors to buy shares in Masayoshi Son’s company. That’s even as it faced billions of dollars in writedowns from a botched initial public offering by WeWork and a sharp decline in shares of Uber Technologies Inc. Now Son’s decision to double down on WeWork has prompted a rare voice of dissent to emerge.

Jefferies Group on Friday cut its rating on the company to hold from buy, a recommendation it held since at least 2014, citing increased risk of SoftBank “throwing good money after bad.” The brokerage also reduced its 12-month price target 19% to 4,530 yen. Of the 19 analysts tracking the company, 17 have buy ratings. Jefferies joins HSBC Holdings Plc in recommending that investors hold for now.

Once some of the brightest stars in the SoftBank constellation, Uber and WeWork now number among its worst performers. SoftBank is planning to take a writedown to its Vision Fund of at least $5 billion to reflect a plunge in their value, according to people with knowledge of the matter. Son is likely to address the subject when the Japanese conglomerate reports results Nov. 6. SoftBank’s shares slid 1.2% on Friday -- their lowest since January and marking a fourth straight day of losses.

“Turns out we were naive to believe that zero is the floor” for WeWork’s worst case scenario, Atul Goyal, an analyst at Jefferies, wrote in a report. “In hindsight, those assumptions were misplaced as the risks have increased.”

Key Insights

• SoftBank has said the capital infusion doesn’t give it a majority of voting rights and WeWork will be treated as an associate, not a subsidiary. But WeWork’s losses and liabilities are likely to weigh on the company’s financials, regardless of how it chooses to account for them, Goyal wrote.
• The company may face increased reputation risk, because of WeWork’s weak governance standards and financial indiscipline. Because the Vision Fund didn’t take park in the additional investment, SoftBank shareholders shoulder more of the burden.
• SoftBank may be reluctant to exit similar situations in the future and needs to clarify its strategy for failed investments.

To contact the reporter on this story: Pavel Alpeyev in Tokyo at palpeyev@bloomberg.net

To contact the editors responsible for this story: Edwin Chan at echan273@bloomberg.net, Colum Murphy

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