(Bloomberg) -- With SoftBank Group Corp.’s sale of Arm Ltd. to Nvidia Corp. in severe jeopardy, the company faces the prospect of losing a jackpot of roughly $74 billion. And its consolation prize is uncertain.
U.S. antitrust officials sued to block the takeover on Thursday, arguing it will stifle innovation in the chip industry. Nvidia has vowed to press ahead, but the transaction also faces reviews from U.K., European Union and Chinese regulators -- as well as opposition from Arm’s own customers -- and Wall Street analysts are all but calling the deal dead.
That leaves SoftBank in a quandary. Nvidia had agreed to buy the business for about $40 billion in September 2020, and a subsequent surge in the bidder’s stock price increased the potential payday by tens of billions of dollars. Other suitors are unlikely to match such an offer and might spark their own regulatory concerns.
So SoftBank’s best alternative may well be an initial public offering for the Arm business -- but that is likely to value the company at far less than Nvidia’s offer.
“Nvidia’s share price has climbed a lot since the announcement and would have implied a very good price for Arm,” said Mio Kato, an analyst at LightStream Research in Tokyo. “I don’t think Arm is worth anywhere near what SoftBank thinks it is, so I think the most realistic option is an IPO.”
SoftBank and Arm are entitled to keep $2 billion Nvidia paid at signing, including a $1.25 billion breakup fee, whether the deal goes through or not.
A representative for Tokyo-based SoftBank declined to comment.
Arm is a prized asset in the chip industry. It licenses technology to hundreds of companies, and its technology is used in devices ranging from smartphones to factory equipment and cars, acting as a neutral party. But that role also makes Arm a difficult asset to sell. Its customers want the business to stay independent -- something they fear won’t be possible under Nvidia ownership.
But pursuing an IPO has its own risks. It’s hard to say how investors would value the Arm business. On average, members of the Philadelphia Stock Exchange Semiconductor Index have a market-capitalization-to-sales ratio of 9.9 times. Using that ratio, with annual sales of about $2.5 billion, Arm would be worth $19.8 billion -- only about 27% the value of the $74 billion Nvidia deal.
If it’s valued at Nvidia’s index-leading 32 times, Arm would be worth almost $81 billion. But that’s a long shot considering Nvidia is currently the star of the semiconductor industry. Sales are booming, its stock has soared 146% this year, and it’s eclipsed the likes of Intel Corp. as the world’s most valuable chipmaker.
When the Arm deal was announced on Sept. 14, 2020, Nvidia’s stock made up $21.5 billion of the $40 billion transaction. The purchase also included $12 billion in cash and as much as $5 billion more if the business hit certain financial targets, as well as $1.5 billion in Nvidia shares for Arm employees.
After Nvidia’s run-up, the stock portion of the deal is now worth more alone -- roughly $57 billion -- than the entire initial transaction.
SoftBank bought U.K.-based Arm in 2016 for $31 billion, and the Nvidia deal would bring a handsome return at a time when it’s facing setbacks elsewhere, such as China.
As recently as last month, SoftBank was upbeat that the deal would close.
“I can’t promise,” SoftBank founder and Chief Executive Officer Masayoshi Son said during a conference call in November. But he said he believed the approval process would be “successful.”
The outlook darkened considerably Thursday. According to Citibank analysts, the chances of the Nvidia purchase closing are now just 5%, down from their earlier estimate of 50%.
“SoftBank will have to start the process for a sale from scratch,” said Koji Hirai, a mergers-and-acquisition banker in Tokyo.
If SoftBank does pursue an IPO for Arm, getting the timing right may be difficult. For now, the sun is shining on the chip industry. Global shortages have put the value of chips in the spotlight, sending the Philadelphia semiconductor index up 36% this year -- well ahead of the S&P 500’s 22% gain.
But some analysts are concerned the stocks are near peak valuation. A delay of months while the regulatory process drags on may deprive SoftBank of the opportunity to get the highest value for Arm in the public markets.
The key question is whether the explosion in data centers, online services and smart devices will extend the rally, letting chipmakers avoid the boom-and-bust cycles of the past. Given Arm’s vital role at the center of it all, Nvidia’s hefty price may not be that high after all, said Matt Bryson, an analyst at Wedbush Securities.
“You could make an argument that SoftBank may be able to do better than that,” he said.
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