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SoftBank-ARM: These Chips Don't Come Cheap

SoftBank CEO Masayoshi Son attends a conference in St. Petersburg on June 17, 2016.
ENLARGE

SoftBank CEO Masayoshi Son attends a conference in St. Petersburg on June 17, 2016.


Photo:

Valery Matytsin/TASS/Zuma Press

Jacky Wong

July 18, 2016 3:43 a.m. ET

Softbank
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’s maverick founder Masayoshi Son intends to give the company a shot in the arm through a post-Brexit megadeal. In so doing, he delays sorting out the mess of his previous big deal.

The Japanese conglomerate announced its largest deal ever to buy U.K. chip designer ARM Holdings
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for more than $32 billion. This is the first major deal since Nikesh Arora, handpicked by Mr. Son to be his successor, abruptly left the firm last month.

It also comes just weeks after SoftBank made nearly $20 billion in asset sales—including stakes in Alibaba and Finnish game maker Supercell—that some investors hoped would be used to pay down debt. Instead, SoftBank will be taking on even more debt, to the tune of one trillion Japanese yen ($9.5 billion) in bridge loans that will convert into longer term financing.

SoftBank’s $20 billion Sprint
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acquisition in 2013 saddled the company with an sixfold jump in net debt. ARM at least is a cash cow. ARM designs chips that power 95% of smartphones. Under an asset-light model in which it licenses designs for others to make the chips, ARM has generated around $500 million in free cash flow each year in the past three years and is sitting on $1.2 billion of net cash. Analysts expect ARM’s adjusted earnings to double by 2020, according to S&P Global Market Intelligence.

Japan’s SoftBank is paying over $32 billion for U.K.-based chip maker ARM. The WSJ’s Rick Carew looks at this latest in a string of big bets by the Japanese telecom giant. Photo: Getty

For that, SoftBank is paying a steep price—the offer values ARM at nearly 50 times this year’s earnings. The plunging pound doesn’t help much, as ARM’s shares were up 17% since Brexit, because it makes most of its money in dollars. A stronger yen, and low interest rates, help on the SoftBank side of things. ARM’s share price has fallen 15% if priced in yen over the past year.

The sudden departure of Mr. Arora has sparked hopes that Mr. Son, who masterminded the Sprint deal, would pay more attention to the indebted telecom operator. Sprint jumped 8% on the day when Mr. Arora announced he would leave the firm and has since risen another 20%, partly on hopes the asset sales would be used to fix its balance sheet. With all that cash going to pay for ARM, that hope is now firmly dashed. Sprint shareholders should cringe.

There could be hope for SoftBank and Sprint shareholders if someone else decides to pay more for ARM. It appears there wasn’t an auction process. There are a list of smartphone makers, chip makers and others, who could potentially enter the fray.

Mr. Son said last month he learned from Mr. Arora the importance of not only investing, but also getting returns. “Until Nikesh came, I wasn’t good at selling stakes in our investments,” he said. Looks like he has quickly gone back to his old playbook.

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SoftBank-ARM: These Chips Don't Come Cheap Reviewed by on . ENLARGE SoftBank CEO Masayoshi Son attends a conference in St. Petersburg on June 17, 2016. Photo: Valery Matytsin/TASS/Zuma Press Jacky Wong July 18, 2016 3:43 ENLARGE SoftBank CEO Masayoshi Son attends a conference in St. Petersburg on June 17, 2016. Photo: Valery Matytsin/TASS/Zuma Press Jacky Wong July 18, 2016 3:43 Rating:
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