Even before the night of August 21, Hiroshi Mikitani, the founder of Japan’s largest e-commerce company, was having a rough summer.
Rakuten’s recently launched mobile business was losing money, shareholders were questioning its investment acumen and the market was sending ominous signals about the expected listing of the company’s online bank.
But five seconds of video, taken at an undated party and posted on social media on August 21, plunged Mikitani into a new dimension of potential trouble.
The footage, shot in what appears to be a nightclub, captures a beaming Mikitani, dressed in his signature black T-shirt, surrounded by young women and pouring Dom Pérignon champagne into the mouth of a partygoer. The video went viral. It couldn’t have come at a more awkward time.
The scandal followed weeks of speculation, including among investors, about some of Mikitani’s recent trades on Twitter. In late June, he spent 20 minutes locked in a late-night online spat with a YouTuber-turned-MP over accusations of a mysterious “President M” and his liking for parties with Ukrainian women.
There was nothing linking President M to Mikitani, but the Rakuten founder later broke his silence, writing on Twitter: “When there are Ukrainians suffering from war, what’s wrong with having a party so they can forget about the war? ?”.
Rakuten said: “We refuse to comment on allegations that are false, misconstrued or taken out of context. We are currently considering our options for legal action against these false allegations and speculation.” Mikitani did not respond to a request for comment through the company.
An untimely scandal
Shareholders told the Financial Times that it was surprisingly bad timing for Mikitani, baseless as the allegations may be. The entrepreneur has been defending his corporate reputation and business vision in increasingly tense engagements with investors as the company faces its big question at the end of 2022: how to generate interest in listing an online banking unit amid of a global technological defeat and the worst market conditions?
Analysts said Rakuten Bank’s initial public offering will be instrumental in stemming a hemorrhage in free cash flow at Mikitani’s group as it builds a mobile network to compete with SoftBank and NTT DoCoMo. Rakuten also announced in May that it was preparing to list its online brokerage unit.
If successful, Mikitani would be one step closer to achieving his dream of bridging retail with telecommunications, a feat few global retailers have managed to achieve.
People involved in the talks said Mikitani was targeting a valuation of more than double the price-to-book ratio, estimated by JPMorgan at around 360 billion yen ($2.6 billion), for Rakuten Bank, which would be comparable to its South Korean rival Kakaobank. which listed shares in Seoul a year ago.
But potential investors approached by Daiwa, which has been hired as an underwriter for the initial public offering, said the target valuation was too high given the market environment. Daiwa declined to comment.
Kakaobank is worth Won 13 trillion ($9.6 billion) after falling about 30 percent below its IPO price. In March, SBI Sumishin Net Bank, another Japanese online bank, postponed its initial public offering, blaming market turmoil caused by the Russian invasion of Ukraine.
Citigroup analyst Mitsunobu Tsuruo said Rakuten needed to consider other financing options as seeking a high valuation for the listings of its banking and securities units was unrealistic in difficult market conditions.
The brokerage estimated a free cash flow shortfall of 460 billion yen this year at Rakuten and another 230 billion yen next year. The group has already reported a ¥460bn shortfall for its non-financial business in the first six months of the year.
Rising Capital Expenditures
The negative free cash flow comes as Rakuten’s capex plans have skyrocketed since it launched its mobile operator service in 2020. Mikitani initially told investors the company would need about 600 billion yen to build out its network. mobile, but Rakuten has already spent more than 1 trillion yen and Citigroup estimates that it will rise to 1.9 trillion yen.
Rakuten shares have fallen more than 40 percent this year on concerns about its financial strength, even as the company has said it will explore other financing options, such as issuing bonds. Last year, the company raised $2.2 billion through equity deals with Japan Post Holdings, Chinese tech group Tencent and US retailer Walmart.
“It doesn’t look like Rakuten can raise the necessary funds to invest in growth while still running a huge free cash flow shortfall. At least the markets are worried and that is why the share price is being driven by credit risk,” Tsuruo said.
In the April-June quarter, the company’s operating loss widened from 63.5 billion yen to 84.5 billion yen and challenges in its mobile business wiped out gains in its e-commerce segment. The mobile unit posted a net decrease of 220,000 subscribers, although the drop was mainly due to the termination of plans that allowed users up to 1GB of free monthly data.
“It’s a total dream world for Rakuten Mobile. It has blown up the company and now they are forced to sell the good bits to feed this giant debt sink,” said a leading asset manager who has owned Rakuten shares over the past year.
Rakuten said mobile losses had peaked and he expected the business to become a source of steady cash flow, similar to how SoftBank has fared with its domestic mobile business.
But while SoftBank founder Masayoshi Son used an exclusive deal to sell Apple’s iPhone in Japan to transform the company into the country’s third-largest carrier, Mikitani hasn’t found a similar weapon to alter the competitive landscape.
“For the mobile phone business, I don’t see when it will be profitable under the current circumstances,” said Tetsuro Tsusaka, an analyst at Morgan Stanley.
“Mobile telephony is already a commodified business, so anyone with money and time can do it. But if you don’t have the money, then you have to lower the cost base until you hit the break-even line,” even if mobile network quality is compromised, he added.