NEW YORK (Reuters) – SoftBank Group Corp. (9984.T) is in talks to acquire a 25% stake in Arm Ltd that it does not own directly from Vision Fund 1 (VF1), the $100 billion investment fund it raised through it. 2017, according to people familiar with the matter, is likely to be a win-win for investors who have waited years for solid returns.
The discussions come as SoftBank prepares to list the chip designer on Nasdaq next month at a valuation of between $60 billion and $70 billion.
If negotiations lead to a deal, the Japanese tech investor will offer big and immediate dividends to VF1 investors, including Saudi Arabia’s Public Investment Fund and Abu Dhabi’s Mubadala. They suffered losses after several SoftBank bets soured on startups such as workspace provider WeWork Inc (WE.N) and ride-sharing company Didi Global (92Sy.MU).
The alternative – allowing VF1 to sell shares of Arm on the stock market over time after an initial public offering (IPO) – usually takes at least 1-2 years given the stake size. It would also be riskier for the fund’s investors because Arm shares are likely to drop after the IPO.
VF1 returned to profitability last quarter thanks to investor excitement around artificial intelligence that boosted the value of some of the startups it’s invested in. However, its previous losses prevented SoftBank from securing outside investors for the Vision Fund 2 (VF2), whose $56 billion in capital came from the Japanese company and its management, including CEO Masayoshi Son.
A big windfall for VF1 investors could boost SoftBank’s chances of tapping them for capital again in the future, though SoftBank currently has no plans to do so, according to the sources.
The sources said Son, who appointed investment bank Raine Group to advise SoftBank on the negotiations, has recused himself from VF1’s deliberations on the matter until the fund independently decides in favor of its investors.
One of the sources added that the investment committee of VF1 and the investment advisory board of SoftBank, in the presence of representatives of the fund investors, are managing the negotiations.
It is not possible to know Arm’s exact assessment that the two sides are discussing their deal, and sources have warned that it is possible that no agreement will be reached.
If a deal is signed, SoftBank will sell fewer Arm shares in the IPO and will likely keep an 85% to 90% stake, according to the sources, who asked not to be identified because the negotiations are confidential.
SoftBank, VF1 and Arm declined to comment. Ren did not immediately respond to requests for comment.
Arm’s IPO would be a boon not only for VF1 but also for SoftBank, which reported its third consecutive quarterly loss last week. It was affected by the decline in the valuations of major holdings such as Chinese e-commerce company Alibaba Group (9988.HK), German telecoms firm Deutsche Telekom (DTEGn.DE) and US wireless carrier T-Mobile US (TMUS.O).
SoftBank, which acquired Arm privately for $32 billion in 2016, sold a 25% stake in the company to VF1 for $8 billion in 2017. SoftBank has also been in talks with several technology companies about making them primary investors in Arm before it floats. The IPO, including Amazon.com Inc (AMZN.O), Reuters reported.
SoftBank said last week that VF1 posted a gain of $12.4 billion on $89.6 billion in investments, while VF2 carried a loss of $18.6 billion on $51.8 billion in investments.
The investment giant has been on “defense mode” since May 2022 after technology valuations collapsed amid rising interest rates and economic uncertainty. But in June, Son said he was planning to switch to “attack” mode amid excitement over advances in artificial intelligence.
SoftBank began preparations for Arm’s IPO after the $40 billion sale of the company to Nvidia Corp (NVDA.O) collapsed last year over objections from US and European antitrust regulators. Arm is considering raising up to $10 billion from an IPO.
Arm’s business has fared better than the broader chip industry because it licenses designs rather than paying to build the processing systems themselves. Its technology has become ubiquitous in smartphones and data centers, providing lucrative royalty payments. However, smartphone demand has been weakening recently, which has affected Arm’s profits.
Earlier this year, Arm rejected a campaign by the British government to list its shares in London and said it would continue to float on a US stock exchange. Arm’s IPO preparations are being led by Goldman Sachs Group (GS.N), JPMorgan Chase & Co. (JPM.N), Barclays (BARCL) and Mizuho Financial Group (8411T).
Additional reporting by Eko Wang and Anirban Sen in New York; Editing by Greg Romeliotis and Mark Porter
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