There is rarely a dull moment at Japan’s Rakuten Group. Ever since founder Hiroshi Mikitani decided to turn his operation from a nimble and interesting e-commerce group to a full-service mobile telecoms heavyweight, the place has been beset by losses and a desperate need for capital.
The latest attempt to strengthen the balance sheet involves Mizuho increasing its investment in Rakuten Securities, the online brokerage, from 20% to 49%, in a deal worth ¥87 billion ($576 million). Which is just as well, because on the same day Rakuten confirmed the deal, it also said it was withdrawing its listing application for Rakuten Securities.
The problem is that Rakuten, at the group level, needs so much money. It reported third-quarter numbers on Thursday including a loss for the quarter of ¥54.5 billion.
¥769 billion of Rakuten's outstanding debt – nine times more than it just raised from the Mizuho investment – is due in the next two years
That is an improvement on the figure for the same quarter last year, which was a ¥94.2 billion operating loss, but it is also much worse than the ¥36 billion loss the market had been expecting.
On top of that, Rakuten’s debt profile is eye-watering. Of its ¥1.79 trillion of outstanding debt, ¥769 billion of that – nine times more than Rakuten just raised from the Mizuho investment – is due in the next two years. While the IPO of the group’s digital banking unit in April helped, raising the equivalent of $625 million, these are not things that can be repeated: they are one-off sales of crown-jewel assets and they are barely denting the outstanding debt.
Price war
More troubling still is the reason Rakuten dropped its securities IPO. It is not because of market sentiment, which would correct itself in time, but the fact that the brokerage has been dragged into a price war and cut its commission on domestic stock broking to zero, mirroring rival SBI Securities (which is partly owned by Mizuho’s rival SMBC).
Trading commissions are most of Rakuten Securities’ revenue. Who would buy stock in the float of a brokerage that can’t charge commissions?
On Thursday, Mikitani told journalists that “there will be no problem in us redeeming bonds” and that they were “working on improving cash flow throughout the Rakuten ecosystem.”
But Rakuten shares initially dropped 1.5% on the news, before ending the day modestly ahead.
Mizuho, on the other hand, ended the day 1.9% higher, and it is hard to escape the sense that it has much the better deal, capitalizing on Rakuten’s desperation for capital.
Rakuten, for all its troubles, has the second-highest number of individual brokerage accounts in the country, and that is very useful for Mizuho, whose strength in domestic retail securities is not considered to be as impressive as that in wholesale.