Approval of T-Mobile-Sprint merger just before SoftBank's earnings may be a 'get out of jail free card'

The troubles don’t seem to be letting up at Japanese SoftBank Group Corp.

The highly-publicized failures of its Vision Fund’s companies are expected to weigh on earnings Wednesday, which will be presented by SoftBank’s chairman and CEO Masayoshi Son. Analysts aren’t all that optimistic, predicting a 20% drop in operating profit (some $3.1 billion, or 345 billion yen) for SoftBank’s 3rd quarter earnings (October through December of 2019 for fiscal year ending March 31, 2020, a notably rough period for the company).

WeWork seemingly started it all, as SoftBank took a massive $9.2 billion write-down on the investment in November. But since then, its Vision Fund’s companies’ woes have only seemed to multiply.

On Monday, SoftBank-backed e-commerce company Brandless Inc., which sells unbranded consumer goods, said it was shuttering and laying off 70 employees, not even two years after SoftBank invested $240 million in the startup. Although SoftBank’s WeWork investment floundered in dramatic fashion, Brandless was actually the first Vision Fund-backed startup to close down.

At Indian hotel company OYO, an announcement last month of job cuts (and potentially more in the future) is another bad sign for SoftBank, as the Vision Fund reportedly invested over $600 million over time into the company, according to Bernstein’s Chris Lane. SoftBank-backed cloud robotics and AI startup CloudMinds also announced job cuts in January. And in the wake of disappointing growth, SoftBank sold back its nearly 50% stake in dog-walking startup Wag Labs in December.

One bright spot? Approval of the Sprint-T-Mobile merger (SoftBank, which owns nearly 85% of Sprint saw its stock soar on the news). It’s “a huge get out of jail free card” for SoftBank, says Morningstar’s Dan Baker. “People were edging toward valuing the equity in Sprint at nothing if the merger didn’t go ahead, so this is a very big deal for them.”

Still, the valuations of some of Vision Fund’s unlisted companies are making earnings a murky affair. SoftBank’s fund said its gains and losses were split 50/50 on its companies in the first six months up to September, but many of the companies were unnamed.

But Baker says there “isn’t that much in the actual results” for SoftBank’s earnings. “To be honest, I don’t think anyone really looks at this company as an earnings type company—it’s a sum of the parts of a bunch of businesses,” he says. And given the ambiguity around valuations of the private some-odd 90 companies in SoftBank’s Vision Fund, “we can’t be too trustworthy.”

“We look at what they’ve done with their numbers in the SoftBank Vision Fund, … but they’re not something you can be confident about going forward,” Baker tells Fortune. For investors, the private valuations that make up SoftBank’s reported performance aren’t anything they should put too much stock in—especially in the wake of WeWork (investors have “probably lost even more confidence in what their numbers will tell us anyway,” Baker says).

What to watch

What’s not so clear is what changes might be coming to SoftBank’s strategy or corporate governance in the wake of a new activist shareholder at the table.

This quarter’s earnings come at a particularly crucial juncture for SoftBank, as the company has become the latest target of notorious activist fund Elliott Management—which reportedly invested almost $3 billion into SoftBank. Billionaire Paul Singer’s New York-based fund is infamous for shaking up its investments, and per Wall Street Journal reports, the fund is pushing SoftBank to buy back between $10 billion to $20 billion in shares under the assertion it is undervalued (SoftBank’s shares currently trade below the value of its assets).

Morningstar’s Baker, for one, isn’t certain Son will play ball in terms of making big changes in the company (one “he very much dominates,” according to Baker). But investors should tune in for any news of an official announcement of buybacks.

Still, coming off of its first quarterly loss in 14 years in the July through September period (which saw an operating loss of 704 billion yen), SoftBank is in a tough spot, right when its second massive fund is struggling to hit its fundraising goal. The new fund might be as little as half its expected $108 billion size, according to a Wall Street Journal report, as investors are growing increasingly wary of the fund’s predecessor, Vision Fund, and its mixed bag of investments (which includes Uber and WeWork). Morningstar’s Baker, for one, thinks new pressure from Elliott might actually prompt discussions about winding down the Vision Fund altogether.

Yet given Son’s reputation of glossing over failures (“He is extremely bullish and rarely mentions negatives—investors are wary of what is not being talked about,” according to Morningstar’s Baker), it’s unclear whether investors will get any more transparency this time around.

To that end, this quarter and beyond might put SoftBank in a sticky situation if it is “unable to explain how it will limit risks from future investments that fail” and “unable to show financial discipline in its investments,” Jefferies’ Atul Goyal wrote in a December note.