SoftBank Group Corp’s financial strains escalated on Wednesday as it agreed to spend more than $10 billion to take over office-space sharing startup WeWork, knocking the Japanese tech conglomerate’s already weakened shares.
SoftBank’s total investment in the money-losing firm will rise to more than $13 billion to give it an 80 percent stake in, but not control of, WeWork, now valued at $8 billion.
Shares in SoftBank Group fell 2.5 percent on Wednesday and have tumbled almost 30 percent from their July peak as investor skepticism grows over the path to profitability for cash-burning investments like WeWork and Uber.
The WeWork deal is structured to avoid SoftBank having to consolidate it or take on onerous lease obligations.
Although SoftBank has an army of retail investors in yield-strapped Japan willing to buy its junk bonds, it already holds about 5 trillion yen ($46 billion) of net debt on its balance sheet - more than half its 9 trillion yen market capitalization.
The cost of default protection on SoftBank Group has risen, with the 5-year credit default swap jumping 17.7 points in a week to the highest level since January.
Disarray at WeWork, which is scrambling for cash following a flopped IPO attempt, comes as SoftBank founder and CEO Masayoshi Son struggles to raise money for a successor to his $100 billion
Vision Fund, sources told Reuters this month.
Son’s strategy of betting on ambitious founders, who will use SoftBank’s generous cash injections to push for rapid growth, has come under growing investor scrutiny.
At WeWork, SoftBank has acted to remove co-founder and face of the company Adam Neumann, first as chief executive and now from the board of WeWork’s parent, following a botched initial public offering (IPO) attempt and corporate governance concerns.
SoftBank’s chief operating officer, Marcelo Claure, will become WeWork’s executive chairman, adding to roles including heading a $5 billion Latin America-focused fund and getting the tie-up between Sprint and T-Mobile US through regulators.
WeWork is “a searing indictment of SoftBank’s valuation and screening methodology, which needs to shift towards being based on fundamentals,” independent analyst Richard Windsor wrote.
SoftBank, which says its valuation methods are based on standard industry practice, faces chunky writedowns on many of its tech bets when it posts second-quarter earnings next month.
Japan’s benchmark index closed up 0.3 percent on Wednesday after trading restarted following a public holiday.