1) SoftBank Mobile value expansion of ¥230 per share annually (EBITDA growth, constant multiple)
2) SoftBank deleveraging of ¥400 per share annually (Capex cliff in 2013)
3) Alibaba value expansion of ¥500 per share ($20 billion per annum Alibaba appreciation)
4) Narrowing of the NAV gap (currently 23% versus consensus)
From a cash and deleveraging perspective, the recently announced sale of the eAccess business to Yahoo! Japan will further bolster these at SoftBank Mobile, as it offloads nearly $1 billion in annual Capex and transfers $4 billion of net cash from Yahoo! Japan to SoftBank. We believe the Yahoo! Japan transaction will unlock ~¥400 per share value for SoftBank, offset by a ~¥120 de‐rating of SoftBank's Yahoo! Japan equity stake, for a net ¥280 benefit to NAV.
Most significantly, SoftBank's market cap has grown by only $9 billion since July 2013 while consensus valuations of Alibaba by U.S. sell‐side analysts have nearly doubled from $86 billion to $171 billion today, implying a $31 billion increase in the value of SoftBank's 37% stake. Likewise, SoftBank's stake in Sprint has also appreciated by $4 billion. The growth in the underlying asset values, enhanced by the accretive nature of the Yahoo! Japan transaction have only served to increase the relative attractiveness of SoftBank shares since October, despite the market's hesitation.
SoftBank is witnessing substantial growth in underlying asset value, de‐levering via the Yahoo! Japan transaction, and poised to drive further de‐levering and free cash flow growth in SoftBank Mobile. It currently trades at a 23% NAV discount to consensus estimates of value. Alternatively, valuing SoftBank Mobile on a P/FCF methodology suggests SoftBank is trading at a 45% NAV discount. The discrepancy lies in the fact that the EV/EBITDA approach understates SoftBank Mobile's high free cash flow conversion and low cost of capital. These discounts are clearly unwarranted. We anticipate SoftBank's NAV will post continued growth and shrink this discount as management's strategy comes into further focus and transparency around underlying assets (particularly Alibaba) improves.
From Daniel Loeb (Trades, Portfolio)'s Third Point first quarter 2014 investor letter.