Rakuten founder embroiled in scandal as investors push

Even before the evening of August 21, Hiroshi Mikitani, the founder of Japan’s largest e-commerce company, was having a tough summer.

Rakuten’s recently launched mobile business was bleeding money, shareholders were questioning its investment acumen, and the market was sending worrying signals about the company’s planned online banking listing.

But five seconds of video, taken at an undated party and posted to social media on August 21, plunged Mikitani into a new dimension of potential trouble.

The footage, shot in what appears to be a nightclub, shows a beaming Mikitani, dressed in his black t-shirt, surrounded by young women and pouring Dom Pérignon champagne into a reveler’s mouth. The video went viral. He couldn’t have appeared at a more difficult time.

The scandal follows weeks of speculation – including among investors – about some of Mikitani’s recent Twitter exchanges. In late June, he spent 20 minutes locked in a late-night online argument with a YouTuber-turned-parliamentarian over allegations of a mysterious “President M” and his fondness for parties with Ukrainian women.

Nothing linked President M to Mikitani, but the Rakuten founder then broke his silence by writing on Twitter: “When there are Ukrainians who are suffering from war, what is wrong with organizing a party so they can forget about the war?”

Rakuten said, “We decline to comment on accusations that are false, misinterpreted, or taken out of context. We are currently reviewing our options for legal action against these false accusations and speculation. Mikitani did not respond to a request for comment via the company.

An untimely scandal

Shareholders told the Financial Times that the timing was surprisingly bad for Mikitani – however baseless the allegations. The entrepreneur has defended his corporate reputation and business vision in increasingly strained engagements with investors as the company grapples with its big question at the end of 2022: how to drum up interest in a stock listing. an online banking unit in the midst of a global technology rout and the worst market conditions?

Analysts said Rakuten Bank’s IPO would be key to stem a free cash flow haemorrhage from the Mikitani 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 realizing his dream of marrying 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 twice 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 was hired as an underwriter for the IPO, said the targeted valuation was too high given the market environment. Daiwa declined to comment.

Kakaobank is worth Won13tn ($9.6 billion) after falling about 30% below its IPO price. In March, SBI Sumishin Net Bank, another Japanese online bank, postponed its IPO, blaming market turbulence caused by Russia’s invasion of Ukraine.

Citigroup analyst Mitsunobu Tsuruo said Rakuten needed to consider other funding options because seeking high valuations for its banking and securities units’ listings was unrealistic in the tough 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 announced a deficit of 460 billion yen for its non-financial activities during the first six months of the year.

Skyrocketing capital expenditure

The negative free cash flow comes as Rakuten’s capital expenditure plans have skyrocketed since launching its mobile operator service in 2020. Mikitani initially told investors the company would need around 600 billion yen to build its mobile network, but Rakuten has already spent over 1 billion yen and Citigroup estimates it will reach ¥1.9 tn.

Shares of Rakuten have fallen more than 40% this year on concerns over its financial strength, even as the company said it would explore other financing options such as issuing bonds. Last year, the company raised $2.2 billion through capital mergers with Japan Post Holdings, Chinese technology group Tencent and US retailer Walmart.

“It doesn’t look like Rakuten can raise the necessary funds to invest in growth while continuing to run a huge free cash flow deficit. At least the markets are worried and that’s why the stock price is influenced by credit risk,” Tsuruo said.

In the April-June quarter, the company’s operating loss fell from 63.5 billion yen to 84.5 billion yen as challenges in its mobile business wiped out gains in its mobile segment. e-commerce. The mobile unit saw a net drop of 220,000 subscribers, although the drop was mainly due to the termination of plans that allowed users up to 1 GB of free monthly data.

“It’s a total dream world for Rakuten Mobile. It blew up the business and now they’re forced to sell the good bits to feed this giant debt pit,” said one of the top asset managers. who has held Rakuten shares in the past year.

Rakuten said mobile losses had peaked and hoped the business would turn into a source of stable cash flow, similar to how SoftBank fared with its domestic mobile business.

But while SoftBank founder Masayoshi Son used an exclusive deal to sell Apple’s iPhone in Japan to turn the company into the country’s third-largest carrier, Mikitani couldn’t find a similar weapon to change. the competitive landscape.

“For the mobile business, I don’t see when the business will become profitable under the current circumstances,” said Morgan Stanley analyst Tetsuro Tsusaka.

“Mobile is already a commoditized business, so anyone with the money and the time can do it. But if you don’t have the money, then you have to reduce the cost base until you break even,” even if the quality of the mobile network is compromised, he added.