New Coverage: Rakuten Group Faces JPY 105B Domestic Bond, $1.75B USD Notes Maturities in 2024; Sale of Securities Unit Stake to Mizuho Securities Reduces Potential IPO Proceeds; Rakuten Mobile LTM Sep’23 EBITDA Loss of JPY 220B, LTM Capex of JPY 287B

Relevant Documents:
Q3’23 Earnings
Q3’23 Strategy Presentation
Q3’23 Appendix Presentation
$450M Reopening of 10.25% Senior Notes Due 2024 Offering Circular
FY’22 Annual Report

Japanese e-commerce, mobile and financial services conglomerate Rakuten Group, Inc. faces more than JPY 320 billion ($2.11 billion) of public debt maturities in 2024, including $1.75 billion of USD notes due in November 2024 which are more recently indicated at a yield to maturity of around 8%. While management has guided for deleveraging through funds raised from the planned listing of Rakuten Securities Holdings, Inc., the company will likely rely on new issuances - particularly JPY denominated corporate bonds - to meet liquidity requirements at the holdco, including funding free cash flow deficits at the mobile business.

In November 2023, the company signed a share transfer agreement to raise JPY 87 billion from the sale of a 29% stake in Rakuten Securities to Mizuho Securities. Following the divestment,
Rakuten Securities Holdings’ stake in Rakuten Securities will fall from 80% to 51%, which could reduce proceeds from any planned listing.

While standalone holdco cash stood at JPY 199.49 billion as of Sept. 30 - which does not include the JPY 87 billion raised in November 2023 - Rakuten may look to raise additional liquidity through new bond issuances and asset sales as it faces:

• JPY 78 billion of remaining bond maturities in the fourth quarter of 2023;


• JPY 320 billion of bond maturities in 2024 which comprise JPY 105 billion domestic bond maturities and $1.75 billion of USD notes maturing in 2024; and


• Requirements to fund negative free cash flow from its mobile business, which recorded an EBITDA loss of JPY 219.99 billion and which incurred JPY 286.97 billion of capex for the twelve months ended Sept. 30.

The company entered into currency swap agreements with respect to the principal and interest of its USD and EUR denominated notes, according to the 2022 annual report. As of Dec. 31, 2022, the outstanding currency swaps were at an average USD/JPY rate of 120.64.

Rakuten’s capital structure as of Sept. 30 is below:

CEO and Chairman Hiroshi Mikitani is Japan’s thirteenth richest man, according to Forbes, with a net worth of $2.6 billion as of November 2023. He founded the company and began operating its e-commerce business Rakuten Ichiba in May 1997 and listed Rakuten on the Tokyo Stock Exchange in 2000.

Rakuten’s simplified corporate is shown below:


Hiroshi Mikitani’s wife Haruko Mikitani directly held a 6.2% stake in the company as of June 2023.

Public Debt Maturities

As of Sept. 30, Rakuten has a consolidated cash balance of JPY 4.705 trillion, including a standalone holdco cash balance of JPY 199.49 billion. The company is looking to redeem a JPY 68 billion subordinated bond on its Dec. 13 first call date, and faces an additional JPY 321 billion of bond maturities in 2024, including $1.75 billion of USD notes due in November 2024:


Rakuten intends to use “equity-related financing” from its planned initial public offering, or IPO, of Rakuten Securities Holdings, Inc. as well as monetization of venture capital arm Rakuten Capital’s portfolio to pay down debts, based on its third quarter 2023 strategy presentation. Rakuten will also look to extend some of its bond maturities in 2024 and 2025.

In addition, the company intends to rely on further improvements of working capital to fund debt repayments, according to the same presentation. For the last twelve months, or LTM, ended Sept. 30, cash outflows from working capital changes for its non-financial businesses narrowed to JPY 80.7 billion from JPY 180.65 billion for the 12 months ended Sept. 30, 2022.

In the second quarter of 2023, the company raised JPY 294.24 billion of cash from issuing 542.3 million shares, including 74.2 million shares issued to entities controlled by CEO Hiroshi Mikitani, CyberAgent Inc and Tokyu Corporation. The company also raised JPY 71.76 billion of cash from the IPO of Rakuten Bank, Ltd during the same quarter.

On Nov. 9, Rakuten announced that Rakuten Securities Holdings and Mizuho Securities entered into a share transfer agreement for Mizuho Securities to purchase 29.01% of shares in Rakuten Securities, Inc. for JPY 87 billion on the same day. Following the acquisition, Mizuho Securities’ stake in Rakuten Securities will rise from 19.99% to 49%, while the remaining 51% will continue to be held by Rakuten Securities Holdings.

According to S&P, notwithstanding the company’s JPY 150 billion of unused committed credit lines and its focus on raising non-debt financing, Rakuten is expected to continue relying heavily on asset sales and new corporate bond issuance to meet upcoming maturities.

Non-Financial Business

Rakuten’s non-financial business consists of its loss-making mobile business, partially offset by cash generated from its internet services business. The internet services business includes businesses running various e-commerce sites such as Rakuten Ichiba, online cash back sites, online travel booking sites and hotel sites, operation of digital content sites in North America, sales of advertising on these sites, the Viber messaging service, as well as businesses related to professional sports teams.

The mobile business includes businesses engaged in communication and messaging services, such as the Mobile Networking Operator, or MNO business and Rakuten Symphony, the company’s cloud-native platform designed to support the development of open mobile networks for third-party telecommunications providers.

Reported EBITDA (before adjustments) for the 12 months ended Sept. 30 amounted to JPY 96.62 billion for the internet services business, as compared to the mobile business’ EBITDA loss of JPY 219.99 billion.

For the twelve months ended Sept. 30, the non-financial business reported operating cash outflows of JPY 132.9 billion and negative free cash flow of JPY 486.68 billion. Non-financial capex of JPY 353.78 billion comprises JPY 286.97 billion incurred by the mobile business and JPY 66.81 billion incurred by the internet services business.

Rakuten Mobile’s revenue grew 6.6% quarter on quarter to JPY 55.7 billion for the third quarter of 2023, but remains insufficient to cover network costs (excluding depreciation) and selling & general expenses, or SG&A, of JPY 26 billion per month as of Sept. 30. According to its third quarter 2023 appendix presentation, Rakuten Mobile is aiming for monthly EBITDA breakeven by end-2024 and annual EBITDA breakeven in 2025 based on the following metrics:

• Achieving 8 million to 10 million subscribers - as compared to 5.12 million as of Sept. 30 - driven by growth in its B2B business;


• Raising average revenue per user to JPY 2,500 to JPY 3,000 - as compared to JPY 2,046 as of Sept. 30 - through higher data consumption for the B2C business and expanded offerings for B2B customers; and


• Lower network and SG&A costs to JPY 23 billion to JPY 25 billion per month.

Reported EBITDA loss for the mobile business has narrowed since the second quarter of 2022:


Rakuten Mobile incurred JPY 138.1 billion of capex - excluding leasing expenses for right-of-use assets and capitalization of specified base stations’ opening fees - for the nine months ended Sept. 30. Full-year 2023 capex expected to be lower than the original guidance of JPY 200 billion, according to the appendix presentation.

Following the signing of a new agreement with KDDI in May 2023, roaming services provided to Rakuten Mobile will be extended to select high-traffic shopping districts in Tokyo, Nagoya and Osaka, thus eliminating or reducing the capex needs for Rakuten Mobile to build out its own network. The new roaming agreement will take effect from June 2023 to September 2026.

In October 2023, the company was awarded the 700MHz frequency band, under which Rakuten Mobile is expected to incur cumulative capex of JPY 54.4 billion by 2033 for the spectrum and total specified base station opening fees of JPY 9 billion, based on the appendix presentation. Yearly operating income breakeven is expected by the financial year ended March 2027, based on the company’s guidance.

Financial Business

Rakuten’s online financial business includes the provision of credit card services to Rakuten members (Rakuten Card), digital banking services (Rakuten Bank), online securities and brokerage business (Rakuten Securities), insurance business (Rakuten Life Insurance and Rakuten General Insurance businesses), and other financial businesses such as cashless transactions business (Rakuten Payment) and cryptocurrency trading services.

The financial business recorded JPY 109.73 billion of operating income and JPY 167.59 billion of EBITDA for the twelve months ended Sept. 30, and consists of:

For the third quarter of 2023, operating income for the financial business rose 35.8% year over year to JPY 28.58 billion, helped by better results from Rakuten Bank, Rakuten Securities and the insurance business:


During the twelve months ending Sept. 30 period, the financial business generated JPY 469.73 billion of operating cash flow. Including JPY 119.08 billion of net purchases of investment securities for the banking and insurance business, net cash flow generated by the financial business amounted to JPY 350.64 billion.

According to the appendix presentation, the financial business paid around JPY 70 billion of dividends and management fees to the holdco in financial year 2022 to help fund the holdco’s cash requirements -- including funding of negative free cash flow in the mobile business.