Rakuten Bank shares surge in Japan’s biggest IPO since 2018

Rakuten Bank shares surged 40 per cent in the company’s debut on Friday, marking Tokyo’s biggest initial public offering since the listing of SoftBank’s mobile unit in 2018.

The internet bank, which is Japan’s largest by number of customers and has been spun out of Rakuten, the country’s biggest ecommerce company, raised $625 million in an IPO after lowering its valuation ahead of the listing.

Bankers running the IPO at Daiwa Securities faced a range of challenges from investors, who questioned the valuation and ultimately forced Rakuten to trim its ambitions for the share sale, said people with direct knowledge of the situation.

Rakuten Bank was founded in 2000 and established itself as an online banking pioneer in Japan. While the banking business has been profitable for the past five years, investors have expressed concerns that Rakuten Group’s business will suffer as a result of the ballooning losses at its mobile unit.

The stock was sold at ¥1,400 ($10) per share in the IPO — significantly below the ¥1,960 at the top of the tentative range. On Friday, the newly listed Rakuten Bank shares briefly surpassed that target to hit a high of ¥1,965, while Rakuten Group fell more than 2 per cent. Shares closed 38 per cent higher at ¥1,930.

“I am not at all surprised that the Rakuten Bank shares have done this,” said Travis Lundy, an independent analyst who publishes on SmartKarma. “It IPOed at a discount to the major Japanese banks, it has a higher expected growth rate and a higher return on equity, so it was always going to be an asset in demand.”

The Rakuten Bank IPO coincides with a revival of foreign investor interest in Japan, where a large number of stocks are cheaply priced and activists have recently succeeded with demands for stock buybacks and other shareholder-friendly action.

Rakuten Group, which is led by the flamboyant Japanese tech entrepreneur Hiroshi Mikitani, launched a mobile network during the early months of the pandemic in 2020 and has been haemorrhaging money ever since. In 2017, Rakuten signed a four-season €55mn-a-year shirt sponsorship deal with Barcelona FC that drew criticism from investors.

Rakuten’s mobile network business was instantly confronted with a government-led price-cutting regime and has only ever managed to gain a market share of around 3 per cent. In February, Rakuten Group announced a record annual loss of ¥372.9bn, marking its fourth straight year in the red. The banking unit logged an annual profit of ¥20bn last year.

Several fund managers who considered investing in the Rakuten Bank IPO said they ultimately decided against doing so because of what they perceived as the “messy” nature of the relationship between the Rakuten parent and the bank.

One fund manager said the relationship was fraught with potential conflicts of interest related to the transfer pricing of services between the parent and child companies.

One broker at a Japanese securities firm not involved in the IPO said it was not surprising that the promise of the Rakuten Bank listing had not raised the share price of Rakuten Group.

“There are lots of good reasons to buy Rakuten, because it is a unique Japanese company with exposure to the growing ecommerce market. The problem for big fund managers is that Mikitani has created a reputation for unpredictability, and that is keeping the shares suppressed,” the broker said, referring to a variety of business decisions, including the Barcelona sponsorship, that have unsettled investors.

As a prominent chief executive, Mikitani has attracted attention in Japan for his life outside work.

Last August, five seconds of video were posted on social media that appeared to show Mikitani in a nightclub surrounded by young women and pouring Dom Pérignon champagne into the mouth of a partygoer. The clip went viral, sparking a scandal.