Global Economics

Softbank-Vodafone Deal Rings True


Masayoshi Son is ready to shake up the world of Japanese telecoms once again. On Mar. 17, Son's Softbank reached a deal with Vodafone to buy the British mobile company's Japanese unit for $15.5 billion.

Vodafone's (VOD) sale, one of the largest ever in Japan, looks like a winner for everyone involved. It will relieve Vodafone execs of the headache of trying to fix a unit with sinking profitability and little hope of catching bigger rivals NTT DoCoMo (DCM) and KDDI (KDDIF) unit AU.

For Son, it's an ideal way to further beef up his company's portfolio of Internet, broadband, and fixed-line services. Vodafone's 15.1 million customers will instantly make him a player in cellular, too. "Through the purchase of Vodafone in Japan, Softbank can enter the mobile-phone business quickly and fully," Son told the Associated Press.

NOT A TOTAL SURPRISE. Softbank (SFTBF) had planned to get into cellular in 2007. Now, Son won't have to pay huge up-front marketing costs to establish a Softbank-branded phone. He also can count on a vast customer base ahead of new rules -- which take effect in November -- allowing mobile-phone users to change carriers while keeping their existing phone numbers. The acquisition will "enable Softbank to get its mobile-phone operation off the ground much more quickly and smoothly than if it were to start from scratch," Deutsche Securities analyst Tetsuro Tsusaka wrote in a Mar. 6 report.

The deal comes as bad news for KDDI and DoCoMo. Son in recent years has turned the Japanese telecommunications world upside down by slashing prices to quickly build up market share. Since launching its Yahoo! (YHOO) BB broadband early this decade, Softbank has grown into one of the biggest broadband providers in Japan. "DoCoMo and KDDI [have been] too optimistic about the threat from the Softbank business, because they thought Softbank wouldn't enter the business for a while," says Kazuyo Katsuma, an analyst at JPMorgan in Tokyo.

The Vodafone-Softbank hookup doesn't come as a total surprise. Analysts had suggested it made sense for both to explore some sort of alliance. Vodafone's excess capacity dovetails nicely with Softbank's expertise in high-speed service, Net-based phones, and superfast data communications.

VODAFONE'S HANG-UPS. Global investors had been urging Vodafone's parent to dump underperforming assets, and its struggling Japanese unit had often been mentioned as a choice candidate. Pressure only intensified when Vodafone issued a disturbing profit warning on Feb. 27 (see BW Online, 2/28/06, "Vodafone's Tough Calls"). "We have been making progress on the turnaround in recent months," Vodafone Chief Executive Arun Sarin said in a statement. "However, given the relative competitive position of the business, the reduced prospects for superior long-term returns, and a good offer from SoftBank, the board took the decision to sell."

Once a superhot brand in Japan, Vodafone has lost ground over the past couple of years. Its share now hovers around 16.7%, compared to 24.1% for KDDI's AU brand and 55.8% for DoCoMo. Vodafone's troubles were mostly self-inflicted: Execs had slashed the budget for network upgrades, delayed the rollout of 3G handsets, and tried to make do with handsets designed for other markets around the world, rather than customizing its lineup for finicky, tech-savvy Japanese consumers (see BW Online, 2/28/06, "Can Vodafone Get Through?").

Last February, Bill Morrow replaced Shiro Tsuda as president of Vodafone's Japan business. At his previous high-profile job in Japan, Morrow spiffed up the No. 3 fixed-line provider Japan Telecom before private-equity firm Ripplewood Holdings bought it. (Ripplewood later sold Japan Telecom to Softbank.) It took Morrow months to stem the exodus of customers to other carriers, beef up the carrier's handset lineup, and fill other holes in the company's services.

PLAYER POTENTIAL. Son shouldn't have too much trouble coming up with financing for a Vodafone Japan takeover. Softbank's credit rating has been rising, its balance sheet looks much stronger than it did earlier this decade, and its share price -- it now trades at $32 a share -- has roughly doubled from depressed levels last September (see BW Online, 2/14/06, "Softbank: A Favorite Son Once More?"). After news broke of a possible Softbank takeover of Vodafone, the company's shares shot up 3.6% in Tokyo trading on Mar. 6.

Surely, Son faces big challenges in a Japanese mobile-phone market reaching saturation. Some Vodafone customers will no doubt splinter off to more-established brands. Yet Softbank might add an array of new services, given its Yahoo BB unit and a stake in the Yahoo Japan Internet portal that could restore the brand.

A Yahoo BB subscriber, for instance, could start an Internet transaction at home on his PC and then pick it up on a mobile phone while commuting to work. Add to that online-auction and video-on-demand services, and the potential for Son's revenue generation looks superior to anything Vodafone could offer. "If Son can leverage content and services across the channels, he's got some really interesting stuff to play with," says Philip Sugai, a mobile-phone marketing expert at the International University of Japan in Niigata. Vodafone, on the other hand, won't be part of the game.


Steve Ballmer, Power Forward
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