Lex Newsletter: Hiroshi Mikitani should admit that Rakuten Mobile failed

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Dear reader,

How many years of losses and debt would you tolerate as a shareholder before calling it quits? For Rakuten shareholders, a net loss of 82 billion yen ($600 million) in the first quarter follows its fourth consecutive year of red ink. Alarmingly, the Japanese e-commerce group has ¥1.2 trillion of outstanding corporate bonds due over the next five years.

Most companies in such dire straits would sacrifice non-core assets to sustain their core business. But Rakuten is not “most companies”. It is the creation of Hiroshi Mikitani, a mercurial former banker. The former Fulbright scholar does things a little differently. Rakuten is therefore pumping capital into its weakest link.

The expensive tagalong is a unit of mobile telecommunications. The mobile segment posted a loss of 102.6 billion yen in the recent quarter, offsetting profits from its lucrative e-commerce and fintech divisions. Telecommunications have weighed on the group’s earnings for years.

Yesterday Rakuten announced it would raise up to $2.5 billion by issuing new shares. Most of the money will be raised through a public offering. Allocations will also be taken by Chief Executive Officer Mikitani, his asset management firm and a couple of major corporate shareholders.

Rakuten plans to issue more than 500 million new shares. This would dilute existing shareholders who do not buy new shares by about a third.

Weary investors had hoped that Rakuten’s next big announcement would be a pledge to slow heavy spending on its mobile operator business. Costs include new base stations and debt repayments.

Shareholder disappointment has been reflected in a 17% drop in the share price since Monday, when share issuance rumors first surfaced.

Operating cash outflow exceeded 100 billion yen in the recent quarter. A large chunk of ¥1.2 trillion of outstanding corporate bonds is expected over the next two years.

In November, Rakuten sold about one-fifth of its Rakuten Securities unit to Mizuho Securities. It raised 70 billion yen by selling part of its stake in Rakuten Bank during the latter’s flotation last month. It will also sell its entire 20% stake in the national supermarket chain Seiyu to US investment fund KKR.

The proceeds from the disposals add to $1.8 billion from Rakuten bonds issued in February. Last year, it issued 150 billion yen in bonds and $500 million in dollar-denominated senior unsecured notes.

Analysts have been wary of the company’s mobile division since its launch in 2020. The sector used to be a stronghold controlled by three major companies: NTT DoCoMo, KDDI and SoftBank. There was little to differentiate the newcomer from the trio of incumbents.

Rakuten captured a 2% market share. Most of the market remains controlled by the top three.

Rakuten also doesn’t have the option to sell its mobile phone business in case the cash burn becomes too much to handle. Incumbents do not need to acquire Rakuten’s business. They could easily absorb displaced customers in case of closure.

Investors lost their temper soon after the launch as debt levels soared. Shares are down 60% from their 2021 peak. Rating agencies in the US and at home have cut ratings. S&P Global downgrades Rakuten Group debt to junk status in 2021.

Some of Mikitani’s previous bets on technological innovation, such as e-commerce and digital banking, have paid off. Rakuten Bank has become Japan’s largest digital lender by assets and is growing rapidly. Rakuten Securities’ general accounts already hit the $8 million mark last year, overtaking local rival Nomura.

Rakuten appears too deeply invested in telecommunications to have a chance to retire. He is estimated to have spent about $10 billion in the four years to 2022 building his mobile infrastructure.

Rakuten’s latest share issue comes at a time when lucrative local peers are trading at attractive valuations.

The bigger problem comes in the form of a potential discount on other profitable units. When investing in units such as Rakuten Bank and Rakuten Securities, which is preparing for a listing, investors will worry about the parent company’s financial health.

Rakuten’s priority should be to support liquidity and improve its credit rating. The cell phone carrier business is a secondary issue.

The price of the new shares, one week away, will be a useful indicator of how much credibility Rakuten still has.

Have fun for the rest of the week,

Jun Yoon
Editor of Lex Asia

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