SoftBank to Acquire Fortress Investment for $3.3 billion

Fortress managed $70.1 billion in investments as of September 30th, 2017

Japanese internet and telecommunications investment giant SoftBank Group Corp., led by CEO Masayoshi Son, has agreed to buy alternative-asset manager Fortress Investment Group LLC (NYSE: FIG) for $3.3 billion in cash to operate alongside the Japanese company’s soon-to-be-set up technology investment fund, as reported by Bloomberg on February 14th, 2017. The all-cash deal marks a shift in strategy for SoftBank, which has so far focused mainly on the telecoms and technology sectors. The Fortress deal will likely help SoftBank in its move to financing investments with private equity cash instead of debt.

SoftBank will pay $8.08 a share for New York-based Fortress, which is a 38.6% premium to the company’s closing price on February 13th, 2017. Fortress principals Pete Briger, Wes Edens, and Randy Nardone have agreed to continue leading the business, which will remain based in New York and operate independently within SoftBank. Shares of Fortress closed up 6.5% at $6.21 on Tuesday, February 14th, 2017, giving the company a market value of about $2.4 billion. Fortress plans to maintain its current base dividend of $0.09 per share for Q4 FY16. The acquisition, subject to approval by Fortress shareholders as well as regulators, is expected to close in the second half of 2017.

About Fortress

Fortress was founded in 1998 by Edens, Nardone, and Robert Kauffman, who came from UBS AG and New York-based BlackRock Financial Management Inc. Briger was hired from Goldman Sachs Group Inc. (NYSE: GS) in 2002. The three founders became billionaires when the fund went public in 2007, raising $634.3 million in the first IPO by a private equity firm. The first among the major US alternative asset managers to go public, Fortress was then valued at $14 billion.

Despite its diversification into a range of hedge fund strategies, from bitcoin to timber, Fortress failed to keep up with the growth in assets under management of bigger peers such as Blackstone Group LP (NYSE: BX), the world’s largest private equity manager. However, Fortress’s stock has slumped by nearly two-thirds since the listing, after the company booked losses over the first five years. The dismal performance has come despite a more than doubling of assets managed by the firm, as dwindling performance by investment managers in the fallout of the global financial crisis has hit profitability.

Fortress’s investments span real estate, hedge funds, and private equity. Fortress managed $70.1 billion in credit assets, private equity holdings, hedge funds and fixed-income investments as of September 30th, 2017. Logan Circle Partners, a traditional bond fund manager inside Fortress, accounted for nearly half of the funds under management. Fortress is one of few global foreign investors with funds that are targeted at Japanese assets. In the wake of the global financial crisis, Fortress bought bad loans in Italy and has a track record in Japan, where it bought hotels held by Lehman Brothers after the bank collapsed in 2008. Fortress boasts investment expertise across a wide range of industries, although technology has not been chief among them.

SoftBank’s ties to Fortress date back to 2014, when Son hired Rajeev Misra away from the asset manager. JPMorgan Chase & Co. (NYSE: JPM) acted as financial adviser to SoftBank, while Weil, Gotshal & Manges LLP and Kirkland & Ellis LLP provided legal counsel, and KPMG LLP acted as accounting and tax adviser. For Fortress, Morgan Stanley (NYSE: MS) acted as financial adviser and Skadden, Arps, Slate, Meagher & Flom LLP provided legal counsel.

Paul, Weiss, Rifkind, Wharton & Garrison LLP provided legal counsel to the Fortress principals. Evercore acted as financial adviser, and Davis Polk & Wardwell LLP provided legal counsel to the special committee of Fortress’s Board of Directors.

SoftBank steps up pace of acquisition

SoftBank’s CEO Masayoshi Son has stepped up the pace of acquisitions in recent years as he transforms his company from a Japanese telecom operator into a more diversified investment company. Since the beginning of 2015, SoftBank has announced at least $44 billion of investments or acquisitions, including its $32-billion takeover of UK chip designer ARM Holdings PLC and a $1.2 billion group-led investment in satellite startup OneWeb Ltd.

SoftBank has emerged into a $68 billion tech investment firm from a $50,000 start-up set up in 1981. SoftBank was one of the earliest investors in Yahoo Inc. (NASDAQ: YHOO) and Chinese e-commerce giant Alibaba Group Holding Ltd. (NYSE: BABA), and more recently in India’s ride-hailing service, Ola. It is known for its large investments in tech companies such as US mobile carrier Sprint Corp. (NYSE: S).

SoftBank has also been stepping up its pace of investments, channeling more than $45 billion into technology investments alongside co-investors over the past two years, and hiving off its overseas investment operations into a separate unit earlier in 2016. Its recent investments include participation in a $4.5 billion fundraising round for Chinese ride-hailing firm Didi Chuxing Technology Co. and $1 billion into South Korea’s largest mobile commerce company Coupang.

To help fund its future investments, SoftBank has sold $10 billion of its stock in Alibaba, in which it has a 28% stake, while unloading its shareholding in Finnish mobile game-maker Supercell Oy for $8.6 billion. For Softbank, the setting up of the new tech fund is a means to accelerate its global growth strategy.

SoftBank to sets up technology investment fund – SVF

SoftBank is teaming up with Saudi Arabia’s sovereign-wealth fund called the Public Investment Fund (PIF) to create a multibillion-dollar technology-investment fund, as reported by The Wall Street Journal on October 14th, 2016. Called the SoftBank Vision Fund (SVF), the fund will be based out of London and will be headed by SoftBank’s head of strategic finance, Rajeev Misra. SoftBank has also engaged former Deutsche banker Nizar Al-Bassam and ex-Goldman partner Dalinc Ariburnu for the project. The fund also counts Jonathan Bullock, COO of SoftBank, and Alok Sama, SoftBank’s CFO, as senior advisers.

While SoftBank plans to invest at least $25 billion over the next five years to the SVF, PIF may contribute $45 billion over the next five years as the fund’s lead partner. SoftBank is also talking to a few large global investors who could eventually invest in the new fund, bringing the total investment to about $100 billion, thereby making SoftBank the world’s largest private equity investor in the technology sector over the next decade. In a recent development, Mr. Son stated in January 2017 after a meeting with President Donald Trump that he plans to invest up to $50 billion of the SVF in the US market, pledging to create about 50,000 jobs.

Apple, tech majors invest in SVF

Technology major Apple Inc. (NASDAQ: AAPL) has confirmed that it will invest up to $1 billion in SoftBank’s SVF, as reported by The Wall Street Journal on December 12th, 2016. The potential investment would connect Apple, the world’s most valuable company with market value of over $621 billion, with one of the world’s largest technology fund. The SoftBank fund is expected to invest in emerging technologies, such as artificial intelligence and the Internet of Things. If Apple were to participate, it could gain a much-needed insight about innovations in these new categories. The other potential investors in SoftBank’s tech fund are Foxconn and Qualcomm Inc. (NASDAQ: QCOM).

Stock Performance

Fortress’s stock finished the day at $7.97, slipping 0.25% at the close on Thursday, February 16th, 2017, having vacillated between an intraday high of $8.00 and a low of $7.96 during the session. The stock’s trading volume was at 36,701,916 for the day. The Company’s market cap was at $3.04 billion as of Thursday’s close.

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