Rakuten seeks billions from investors to shore up its mobile strategy

  • Japan’s Rakuten Group is convinced that investing in its mobile networks and services will pay off in the long run
  • But the cost of building out nationwide 4G and 5G networks is costing billions and hammering the company’s financial performance
  • Now it is aiming to raise $2.45bn by issuing new shares to invest further in Rakuten Mobile and pay down some debt
  • Some investors have clearly seen enough and are offloading their Rakuten stock

Japan’s Rakuten Group has confirmed plans to raise ¥332.2bn (US$2.45bn) by issuing new shares, mostly through a public offering, and noted that it will use the proceeds to pay off some of its existing debt and to further finance its mobile network and services plans: Reuters had reported the plans on Monday, ahead of an official company announcement.  

The move comes only days after the digital services giant published its first-quarter report, which showed that while the overall group is generating record revenues – up by 9.3% year on year to ¥475.6bn (US$3.5bn) – its profitability is still being impacted by Rakuten Mobile, which reported an operating loss of ¥102.7bn (US$758m) over the first three months of this year alone – see Rakuten Mobile is still stuck in first gear.

Given that the overall Rakuten Group reported an operating loss of just ¥69bn ($508m) for the first quarter, inclusive of Rakuten Mobile’s loss, it’s not hard to see that, without the negative impact of the mobile division, the company would be profitable.

But this shouldn’t be surprising anyone: The company’s management, when it decided to invest heavily in building out its own cloud-oriented 4G and 5G networks across Japan over a short time span, said that the up-front cost would weigh down the financials but that it would be worth it in the medium and long term. And it always stated that the worst of the losses would be incurred during 2022, after which the numbers would improve – which they are doing, as the quarterly operating losses at Rakuten Mobile, while still enormous, are improving quarter by quarter.

And the company is not deviating from its steadfast belief that it is worth the pain for longer-term gain. 

In its announcement about the new capital raise, Rakuten noted that the key medium of interactivity with customers for its broad spectrum of applications – including e-commerce, digital content, financial services and communications services – is via mobile apps and their associated devices. “There is no doubt that mobile devices are the most important user touchpoint for the expansion of the company’s existing services and new service development, and as 5G spreads and IoT (internet of things) permeates society, we believe that mobile devices will become even more indispensable to people’s lives,” it stated in this announcement. “The operation of the mobile business by the group, which is developing a wide variety of services, is extremely important in terms of strengthening the ‘Rakuten Ecosystem,’ and thereby realising further growth of the group and contributing to the enhancement of corporate value,” it added. 

So the mobile business is absolutely key, and Rakuten now believes it has greater visibility into the way the business, including the associated capital and operating cost base, is developing. “Recently, as the trend of a gradual decline in operating loss in the mobile segment has become certain, future profitability is in sight, and the realisation of the accelerated installation of base stations is expected to stabilise capital investment, we believe that it is now possible for us to foresee, to a considerable extent, the total amount of the funding necessary for the future growth of the mobile business. Under these circumstances… we have determined that seeking funding through the issuance of new shares of the company is the optimal financial strategy option,” it noted. 

About ¥188bn ($1.4bn) of the funds to be raised will be allocated (in the form of investments and loans) to Rakuten Mobile, of which ¥40bn ($295m) will be used for further 4G and 5G network infrastructure deployments and ¥148bn ($1.1bn) for “working capital (terminal purchase funds, customer acquisition costs, and roaming costs).”

That working capital investment will be critical because, as yet, Rakuten Mobile has not attracted the users it needs to gain scale, though the potential is there, as we noted in our reporting of the company’s first-quarter financials last week: Rakuten Group has 40 million active monthly users across its portfolio of services, but only about 10% of those are signed up for the company’s mobile services. 

But even if it converted all of those group customers into mobile accounts, Rakuten would still, at best, be Japan’s third-largest mobile operator – it has a lot further to go to achieve its bold but clearly stated ambition to be the “number one carrier in Japan”.

And Rakuten Group shareholders are not exactly enamoured with the plan to issue about 547 million new shares, a move that will dilute the value of the stock already issued. Rakuten Group’s share price fell by 5.1% to ¥610 on the Tokyo stock exchange on Tuesday following confirmation of the share issue plans.

- Ray Le Maistre, Editorial Director, TelecomTV