Even earlier than the night of August 21, Hiroshi Mikitani, the founding father of Japan’s largest ecommerce firm, was having a tricky summer season.

Rakuten’s just lately launched cell enterprise was bleeding money, shareholders have been questioning his funding acumen and the market was sending ominous indicators in regards to the deliberate itemizing of the corporate’s on-line financial institution.

However 5 seconds of video, taken at an undated occasion and posted on social media on August 21, have plunged Mikitani into a brand new dimension of potential bother.

The footage, shot in what seems to be a nightclub, captures a beaming Mikitani, carrying his trademark black T-shirt, surrounded by younger ladies and pouring Dom Pérignon champagne into the mouth of a partygoer. The video went viral. It couldn’t have emerged at a extra awkward time.

The scandal adopted weeks of hypothesis — together with amongst buyers — over a few of Mikitani’s latest exchanges on Twitter. In late June, he spent 20 minutes locked in a late-night on-line spat with a YouTuber-turned-parliamentarian over allegations of a mysterious “President M” and his style for events with Ukrainian ladies.

There was nothing to hyperlink President M with Mikitani, however the Rakuten founder later broke his silence, writing on Twitter: “When there are Ukrainians affected by the struggle, what’s mistaken with having a celebration in order that they will overlook in regards to the struggle?”

Rakuten mentioned: “We decline to touch upon accusations which might be unfaithful, misconstrued or taken out of context. We’re at present contemplating our choices for authorized motion towards these false accusations and hypothesis.” Mikitani didn’t reply to a request for remark through the corporate.

An ill-timed scandal

Shareholders instructed the Monetary Occasions that it was stunningly dangerous timing for Mikitani — nevertheless unfounded the allegations could also be. The entrepreneur has been defending his company fame and enterprise imaginative and prescient in more and more tense engagements with buyers as the corporate faces its nice query of late 2022: how to attract curiosity within the itemizing of a web based banking unit in the course of a world tech rout and the worst market circumstances?

Analysts mentioned the preliminary public providing of Rakuten Financial institution will likely be vital in stemming a haemorrhage in free money circulate at Mikitani’s group because it builds a cell community to compete towards the likes of SoftBank and NTT DoCoMo. Rakuten additionally introduced in Could that it was making ready to checklist its on-line brokerage unit.

If profitable, Mikitani can be a step nearer to reaching his dream of marrying retail with telecoms, a feat few international retailers have managed to ship.

Individuals concerned within the talks mentioned Mikitani was focusing on a valuation of greater than two occasions price-to-book ratio — estimated by JPMorgan to be about ¥360bn ($2.6bn) — for Rakuten Financial institution, which might be corresponding to South Korean rival Kakaobank, which listed shares in Seoul a yr in the past.

However potential buyers approached by Daiwa, which has been employed as an underwriter for the IPO, mentioned the focused valuation was too excessive contemplating the market surroundings. Daiwa declined to remark.

Kakaobank is value Gained13tn ($9.6bn) after falling about 30 per cent under its IPO value. In March, SBI Sumishin Web Financial institution, one other Japanese on-line financial institution, postponed its IPO, blaming market turmoil brought on by Russia’s invasion of Ukraine.

Citigroup analyst Mitsunobu Tsuruo mentioned Rakuten wanted to think about different financing choices, since searching for a excessive valuation for the listings of each its banking and securities items was unrealistic below the powerful market circumstances.

The brokerage estimated a free money circulate deficit of ¥460bn this yr at Rakuten and one other ¥230bn subsequent yr. The group has already reported a deficit of ¥460bn for its non-financial enterprise within the first six months of the yr.

Ballooning capital expenditure

The unfavourable free money circulate comes as Rakuten’s capital spending plans have exploded because it launched its cell provider service in 2020. Mikitani initially instructed buyers the corporate would wish about ¥600bn to construct its cell community, however Rakuten has already spent greater than ¥1tn and Citigroup estimates that may rise to ¥1.9tn. 

Rakuten’s shares have tumbled greater than 40 per cent this yr on issues about its monetary energy, at the same time as the corporate has mentioned it would discover different financing choices corresponding to issuing bonds. Final yr, the corporate raised $2.2bn by way of capital tie-ups with Japan Publish Holdings, Chinese language tech group Tencent and US retailer Walmart.

“It doesn’t seem like Rakuten can elevate the mandatory funds to spend money on development whereas persevering with to run an enormous free money circulate deficit. No less than the markets are involved and that’s the reason the share value is being pushed by credit score danger,” Tsuruo mentioned.

Within the April to June quarter, the corporate’s working loss widened from ¥63.5bn to ¥84.5bn with challenges in its cell enterprise wiping out the positive factors from its ecommerce section. The cell unit recorded a web decline of 220,000 subscribers, though the drop was primarily as a result of termination of plans that allowed customers as much as 1GB of month-to-month knowledge totally free.

“It’s a complete dreamworld for Rakuten Cell. It’s blown up the corporate and now they’re being pressured to unload the great bits to feed this large sinkhole of debt,” mentioned one main asset supervisor who has held Rakuten shares over the previous yr.

Rakuten mentioned the cell losses had peaked and hoped that the enterprise would convert right into a supply of regular money circulate, much like how SoftBank has fared with its home cell enterprise.

However whereas SoftBank founder Masayoshi Son used an unique deal to promote Apple’s iPhone in Japan to rework the corporate into the nation’s third-largest provider, Mikitani has not discovered an analogous weapon to change the aggressive panorama.

“For the cell enterprise, I can’t see when the enterprise will ever flip worthwhile below the present circumstances,” mentioned Morgan Stanley analyst Tetsuro Tsusaka.

“Cell is already a commoditised enterprise, so anybody with time and money can do it. However when you don’t have the cash, then it’s important to decrease the fee base till you attain the break-even line” even when the standard of the cell community is compromised, he added.