Now SoftBank Has to Decide Whether to Write Down Its WeWork Stake

(Bloomberg Businessweek) -- We’ll soon find out if SoftBank founder Masayoshi Son is a tech visionary or a genius in financial engineering. He started the $100 billion Vision Fund barely three years ago, and SoftBank is already making good money from asset management. In the fiscal year ended in March, more than half of SoftBank Group Corp.’s operating income came from unrealized valuation gains of investments it made via the Vision Fund, eclipsing earnings from core operations such as its domestic telecommunications.

But now SoftBank has a problem: WeWork. The initial public offering of its parent company, We Co., is being delayed, and when it does occur, the stock market may value the company at as little as $15 billion, about one-third of the $47 billion valuation it had when Son last put money into the company. As the September quarter draws to a close, SoftBank will need to decide whether to write down the value of its 29% stake in WeWork. A representative for SoftBank declined to comment.

Fair-value accounting rules do give venture capital firms a lot of leeway in pricing their investments. There is no true mark-to-market number for WeWork, because its shares aren’t publicly traded. There are no publicly listed peers SoftBank can benchmark to, either, because Son’s unicorns are all unique. He could use an income-based accounting model to justify his price tag, arguing that WeWork’s business outlook hasn’t really changed.

But that wouldn’t be prudent. WeWork and Uber Technologies Inc. are the two highest-profile unicorns the Vision Fund has bought into, and by now, the whole world knows Son overpaid. SoftBank’s books look a bit like the emperor has no clothes. People may think he has something to hide if he doesn’t update WeWork’s valuation. “Fair value should be affected by a failed IPO,” so Son should be preparing for a writedown, says Allen Huang, associate professor of accounting at the Hong Kong University of Science and Technology.

Not to mention that consistency is important in fair-value accounting. In the past, SoftBank has been quick to write up its startups’ stakes—even if the so-called fair value was based only on later funding rounds—so it should be responsive with a writedown, too. For example, in the June quarter, SoftBank booked 408.5 billion yen ($3.8 billion) in unrealized gains, partly because of its investment in Indian hotel chain Oyo, whose valuation had doubled from $5 billion in September 2018 to $10 billion. Analysts have already raised eyebrows: The biggest investor at Oyo’s latest funding round was its own founder, Ritesh Agarwal, whose share purchase was financed by a group of Japanese banks that also count the debt-laden SoftBank as one of their biggest clients. Refusal to report the valuation loss on WeWork would only raise more concerns about corporate governance.

And embarrassingly, a realistic value for WeWork right now would be even lower than the $15 billion that’s floating around on Wall Street. That figure is based on a successful IPO, which would generate $3 billion from share sales and be accompanied by $6 billion in loans that are contingent on a listing. Without an IPO, will SoftBank be able to arrange the $9 billion WeWork needs to reach its full potential? If not, its valuation should be lower. We’re staring into billions in losses. Since January 2017, SoftBank, directly and through its Vision Fund, has invested into the startup at an average valuation of $24 billion, according to estimates from Bernstein Research analyst Chris Lane. So if, say, the fair value of WeWork drops to $15 billion, SoftBank could face up to $2.8 billion in writedowns, practically unwinding the unrealized valuation gain it recorded in the quarter ended in June.

Of course, Son could choose to not write down the value at all. But he runs a venture capital fund, and we all understand that not every investment needs to be successful. Fair value of such a fund goes up and comes down. If the Vision Fund’s value only rises or is somehow kept eerily stable, then investors may have questions about the credibility of its accounting.
 
Shuli Ren is a columnist for Bloomberg Opinion.

To contact the editor responsible for this story: Jeff Muskus at jmuskus@bloomberg.net, Rebecca Penty

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