Why did Vodafone quit Japan and sell Vodafone-Japan to Softbank?
Following Vodafone’s decision to end business in Japan and the announcement of the sale of Vodafone-Japan to SoftBank, this author has been asked to brief the Technology Attaches of the 25 EU Embassies in Tokyo on Japan’s mobile phone and telecom sector, mobile internet and broadband.
The EU Technology Attaches were particularly interested in the impact on Europe by the termination of by far the biggest ever European investment in Japan. Clearly it is also important to determine, what other European companies can learn from Vodafone’s experience.
European Union awards project contract to Eurotechnology Japan KK to compare EU and Japan in wireless and fix-net broadband, and to prepare recommendations for EU what can be learnt from Japan
Eurotechnology Japan KK has been awarded a contract by the European Union to benchmark Japan’s telecom sector vs EU, particularly in broadband and make recommendations to the EU how EU can learn from Japan in the telecommunications sector.
Vodafone Japan turn around under SoftBank – Interview for Red Herring
Helped RedHerring with an interview on the recent SoftBank accounting adjustment. The article is entitled “Softbank Falls on Lehman Cut” and appeared on the RedHerring website on August 28, 2006. Our company also recently advised a major global financial institution on related issues and risk issues.
Here a short summary of what I said
Essentially Vodafone-Japan is a company which has been going downhill in many ways for the last 4 years, they lost a lot of subscribers, and there has not been enough investment in equipment and staff, etc. For that reason and other reasons Vodafone sold the Japan operations this March to Softbank (read our report on SoftBank here).
Japan’s mobile market is really difficult, and there is tough competition. There is much trust in the entrepreneurial skill of Softbank Chairman and founder Masayoshi Son – only through his reputation and track record could Softbank attract US$ 15 billion in bank loans to acquire Vodafone Japan KK. Personally I have a very high opinion about Masayoshi Son’s abilities – and I think there is a high chance that he will succeed to turn round this company. Many people feel so, otherwise Son would not have been able to obtain the finance for the deal. Masayoshi Son has built not just one, but many successful companies, and he is maybe the strongest driving fource behind Japan’s internet revolution.
I think for the turnround to be successful will take quite some time, and probably the shares of Softbank will go up and down many times before the company is turned round. I am not a share holder of Softbank, but my thought would be that this is really an investment for the longterm, unless you are playing on shortterm fluctuations which some investors also do. But then you have to understand exactly what you are doing and live with the risk.
Regarding the revaluation of the plant (mainly base stations, antennas, backhaul, computer systems etc) of the company, I am not an accountant so I cannot comment on the accounting issues and regulatory issues here.
However keep in mind that Vodafone has last year written off about US$ 50 billion mainly for the Mannesmann acquisition. Softbank has not written off anything as far as I understand it, they converted plant into good will which as far as I know increases the period of write off from 10 to 20 years. But was I said, I am not an accountant.
SoftBank did not lose a moment to start turning Vodafone KK around, within a few days Vodafone’s former headquarters were moved to SoftBank’s headquarters in Shiodome, and most Vodafone expatriates were sent back to Europe. If you are interested to know why Vodafone decided to sell Japan operations to SoftBank and quit Japan, you can read many details here.
Yesterday (August 26, 2006) SoftBank opened the new Roppongi flagship store. SoftBank’s white/silver/grey colorscheme replaces Vodafone’s bright red:
Understand Softbank: our report: “SoftBank today and 300 year vision”
On March 17 SoftBank announced the full acquisition of Vodafone’s Japan subsidiary – the former J-Phone – jointly with YAHOO-Japan as a co-investor – so with about 15 million mobile subscribers in the world’s most advanced mobile market (Japan), SoftBank/Apple will have the firepower to make such a phone a success, provided it’s tuned to Japanese consumers’ needs and dreams – my guess is that it probably will be.
By pure coincidence, the Apple/SoftBank headlines appeared one or two days after DoCoMo and Microsoft announced a music cooperation.
Apple/SoftBank iPod mobile phones coupled to iTunes could have quite a lot of impact on Japan’s music industry: about 20% of Japan’s music sales are to mobile phones. Of all music downloads in Japan about 6% are fixed line internet downloads, and 94% are music downloads to mobile phones: internet music downloads are almost neglibile in comparison to mobile phone music downloads.
Therefore even if iTunes has a huge market share in the fixed line internet world, iTunes cannot have much impact in Japan overall if limited to fixed line internet downloads. iTunes downloads to mobile phones will change the business models of Japan’s music industry – at the moment music downloads to mobile phones cost a lot more than iTunes downloads. An iPod/iTunes music store could reshape the mobile music market in Japan.
Implications for Europe of Vodafone’s withdrawal from Japan
As a European myself, I am looking at the wider implications for Europe of Vodafone’s withdrawal from Japan – and our company was recently awarded a contract by the European Union Government on exactly these issues – as well as others.
Vodafone’s investment was by far the largest European investment in Japan. What is maybe less well known is that Vodafone was dispatching a relatively large stream of managers between several continents (Europe, Australia etc) and Japan. Several times when visiting the KDDI Designing Center for example I could meet young German Vodafone managers who had just arrived for a management position at Vodafone-Japan, and who were studying the mobile phone handsets in KDDI’s showroom. These expatriates all left within a few weeks of SoftBank taking control of the company.
As a result of these interactions, Vodafone could bring J-Phone’s J-Sky mobile internet service to Europe, which was adapted for European conditions and rebranded “Vodafone Live!”. There would be no “Vodafone Live!” in Europe without Vodafone’s acquisition of J-Phone (including JSky). Vodafone also brought SHARP and Toshiba mobile handsets to Europe.
Apart from the immediate impact on Vodafone as a Corporation, we expect also a more general longterm impact from the strong reduction of Europe-Japan technology exchanges due to Vodafone’s withdrawal from Japan.
Underestimating the importance of cross-cultural management skills and the associated perils
While large US corporations, including INTEL, General Motors, and Motorola have been forced by confrontation with Japan’s competition to completely reshape themselves, this has not yet happened to any large European corporation because of the larger perceived separation between EU and Japan.
SoftBank acquires Vodafone’s Japan operations, announces turnaround strategy
SoftBank turnaround for Vodafone-Japan: Focus on customer service and increased investments
by Gerhard Fasol
SoftBank has acquired Vodafone-Japan (Vodafone KK) and will change the name to SoftBank Mobile.
SoftBank‘s alliance with APPLE to develop iPod-mobile phones is the latest in a string of actions to take the former J-Phone back onto the growth track before Vodafone acquired it. One day after announcing the acquisition, SoftBank announced a target of 26 million subscribers (compared to today’s 15 million).
SoftBank turnaround: five point strategy to turn around Vodafone-Japan
A few days after acquiring Vodafone-Japan, SoftBank announced a five point SoftBank turnaround program for Vodafone Japan, which is now well on-track:
1. Continued use of mail addresses:
SoftBank has learnt from Vodafone that it does not pay to force 15 million subscribers and all their friends and acquaintances to change email addresses …
2. Strengthen the shops and customer service:
SoftBank is reversing Vodafone’s store strategy – SoftBank has started to recruit full-time regular employees for it’s stores, and plans to sell APPLE products and iPod phones in the stores.
3. Rebranding – Change to an easy-to-understand and familiar company name:
The brand “Vodafone” will be replaced by SoftBank Mobile.
4. Stepping up capital investment:
On Friday April 21, 2006, SoftBank announced the decision to increase the investments to YEN 250 billion to increase the number of 3G base stations from 20,000 to 30,000. This is a reversal of Vodafone’s initial strategy to dramatically cut investments in Japan during it’s ownership of J-Phone/Vodafone KK (for graphics of investment data by Japan’s operators see our blog)
5. Synergies with SoftBank BB, Japan Telecom and YAHOO:
Softbank now reunites the former Japan Telecom – which Softbank has acquired in two steps from Vodafone. First Vodafone acquired the fixed line operations via Ripplewood and now the former mobile subsidiary of Japan Telecom from Vodafone. Synergies between YAHOO-Japan and SoftBank’s new mobile operations are particularly interesting and promising – think mobile auctions… now SoftBank is moving further into eBay’s territory in Japan, or what is eBay’s territory anywhere else in the world, except in Japan.
Softbank acquires Vodafone Japan in an approx. US$ 15 billion deal – worth an estimated US$ 83 billion ten years later
SoftBank and Yahoo-Japan acquired 97.7% of outstanding shares of Vodafone Japan (Vodafone KK) in Japan’s largest M&A transaction (the remaining 2.3% are owned by other investors). In a Leveraged Buy-Out (LBO) a consortium of banks extended US$ 9.5 to 10.4 Billion in loans.
Citibank was the lead in this transaction on SoftBank side, but because of the size of this transaction, essentially all major players in Japan’s financial industry were involved – including our company, which advised one of the loan risk assurance companies on aspects of the risks of this transaction.
Ten Years later (2016) we estimate that Vodafone-Japan would have been worth approx. US$ 83 billion
We estimate that ten years later, had Vodafone-Japan been successful, would have been worth an estimated US$ 83 billion, a value lost to Vodafone as opportunity cost, and the reward to SoftBank fur the successful turnaround.
For details of our analysis of the value of this company ten years later read:
SoftBank’s aim: grow to 26 million mobile subscribers and become No. 2 in Japan
SoftBank announced the plan to return to J-Phone’s growth curve and to aim for 26 million subscribers, which would place the resulting mobile operator on place 2 in Japan.
Japan’s new telecom landscape
Three major players emerge after a sequence of consolidation and restructuring: NTT, KDDI and Softbank/YAHOO. The following figure outlines Japan’s telecom sector in 2006:
Understand Japan’s telecom sector
Understand Softbank: our report: “SoftBank today and 300 year vision”
“Vodafone K.K.’s Tsuda, 津田志郎, seeks growth in Japan, not sale”
However, sale to SoftBank may be the way forward
About one year ago, in an interview with Bloomberg (“Vodafone KK’s Tsuda seeks growth in Japan, not sale“), I mentioned that a sale of Vodafone’s Japan operations to Softbank might be the way Vodafone will go in Japan. This seems to be happening now and negotiations to this effect were confirmed by both Softbank and Vodafone over the weekend.
The potential deal
Although a deal has not been closed yet, it is widely reported that a sale of Vodafone’s Japan operations to Softbank is very likely to be closed within a few weeks. What could this deal look like?
As reported by Bloomberg Vodafone KK’s capitalization at the point of delisting from the Tokyo Stock Exchange was around YEN 1.4 Trillion (= about US$ 12 Billion). Bloomberg mentions estimations by London based analysts who value Vodafone KK in the range US$ 14 to 16 Billion. Of course, if a deal is actually concluded, it might be a complex deal with several components, not just a simple cash price, and any cash value will not be determined by analysts in London, but on the negotiating table between Softbank and Vodafone, and the final deal could be more complex than a simple sale against cash payment.
In any case, this deal – if it happens – promises to become one of the largest M&A transactions ever in Japan sofar in terms of cash value. Vodafone is reported to prefer a cash deal, and Softbank has been reported to consider a leveraged buy-out (LBO) where Softbank will take debt against the to-be-acquired company.
It has also been reported that Softbank seems to be planning to change the name of the resulting company, so the “Vodafone” brand is not likely to survive in Japan.
What is Softbank likely to do with Vodafone’s Japan operations
An acquisition of Vodafone’s Japan operations will be the completion of Softbank‘s march to build a full-scale telecommunications group on a par with NTT and KDDI through a series of acquisitions plus internal growth.
Softbank in this new shape will become a much more serious competitor for NTT and KDDI, which both have succeeded to transform themselves from former monopolies into some of the world’s most advanced telecom operators.
In a sense Softbank is already where DoCoMo and KDDI are working very hard to get to: DoCoMo and KDDI are working hard to build content and transaction businesses (such as shopping, financial services, auctions and music), because pure traffic revenue (ARPU) is driven down by relentless competition.
Softbank is strongly linked to YAHOO-Japan, and YAHOO-Japan demonstrated it’s strength by driving eBay out of Japan – so Softbank is already where DoCoMo and KDDI want to go. All Softbank still needed was a wireless network, and with a Vodafone acquisition, Softbank will have a wireless network much faster than expected.
A Vodafone/Softbank deal will not be a good development for eAccess/eMobile, and eAccess/eMobile is reported to have submitted documents to Japan’s regulatory authorities regarding Softbank’s wireless license. It will be interesting how the regulating government ministry will decide on the regulatory aspects of any Softbank/Vodafone deal. In the past few years Japan’s government has been singularly focused on creating the conditions to make Japan the most advanced IT market in the world, so I think we can be confident to expect a wise decision – wise for Japan, not necessarily beneficial for particular mobile operators.
What made Vodafone change it’s mind about Japan?
As reported by Bloomberg, one year ago Vodafone had the clear intention to remain in Japan for the next 10, 20, 30 years. What made Vodafone change it’s mind?
As widely reported, Vodafone was loosing market share in Japan’s mobile phone market over the last several years.
With number portability being introduced in Japan from autumn 2006, and with three new operators entering the market during 2006-2007, the competitive environment will become much more severe than it is now, decreasing pure network profitability, while at the same time massive network investments are necessary.
Overall Japanese mobile operators generate on the order of US$ 10 Billion/year in profits with a rising tendency.
US$ 10 Billion/year profits attract three new entrants to Japan’s mobile markets (eMobile, YAHOO-BB and IP-mobile), mobile virtual operators, and attracted Vodafone to acquire J-Phone some time ago.
DoCoMo’s domestic profits in particular have been continuously rising to reach the spectacular figure of US$ 8 billion/year recently. However, conspicuous is a US$ 10 billion hole (shown in bright red color in the figure below) in DoCoMo’s otherwise impeccable record. This US$ 10 billion losses are DoCoMo’s write-offs for investments in KPN-Mobile (Netherlands, Germany and Belgium), Three-Hudginson (UK) and AT&T-Wireless (US). DoCoMo has withdrawn from all three investments and has written off about US$ 10 billion. Most companies on planet earth will not survive a US$ 10 billion write-off – however, DoCoMo’s incredible domestic performance allowed DoCoMo to survive this US$ 10 billion write-off without much trouble.
Vodafone’s performance in Japan is rather mixed – the results show a zig-zag line with profits one year and losses the next and average profits around zero, if performance is averaged over several years.