SoftBank to Reduce Alibaba Stake, Expects $34 Billion in Gains

By unloading Alibaba shares valued at $22 billion, SoftBank is accelerating a separation between two companies that once were tied at the hip and symbolized Asia’s technology boom.

Both have hit a rough patch. SoftBank Chief Executive Mr. Son said this week he regretted an investment spree that led to a record $23 billion loss in the latest quarter, while Alibaba, formerly led by Mr. Son’s friend

Jack Ma,

has seen its shares lose hundreds of billions of dollars in market value after a tech crackdown by China’s government.

SoftBank said its stake in Alibaba was expected to fall to 14.6% by the end of September, down from 23.7% as of June 30. As a result, SoftBank will change its accounting treatment of Alibaba and no longer count a portion of the Chinese company’s profits as its own. Instead, Alibaba will be just another one of hundreds of investments on SoftBank’s books.

The move is the result of SoftBank settling contracts it has made in recent years with financial institutions using Alibaba shares. In those contracts, SoftBank got billions of dollars in cash upfront. It promised its bankers that it would either pay back the cash later or give them Alibaba shares to settle the contracts.

The contracts were akin to someone getting cash at a pawnshop in exchange for temporarily handing over a gold watch or pearl necklace. Customers can typically get their pawned valuables back later if they return the cash plus interest, or they can keep the cash if they forfeit the item.

SoftBank said Wednesday that it has decided to keep the cash. By giving up its Alibaba shares, SoftBank said it would “further strengthen our defense against the severe market environment” and “eliminate concerns about future cash outflows.”

SoftBank said it would hand over up to 242 million American depositary receipts of Alibaba—shares valued at $22 billion at the Tuesday closing price. Alibaba’s ADRs rose 1.4% Wednesday to $92.43.

The relationship between Messrs. Son and Ma goes back more than two decades when Mr. Son, already a billionaire technology entrepreneur, hit it off with the Chinese startup founder. In 2000, SoftBank invested $20 million for a stake in Alibaba. As Alibaba grew to become one of China’s dominant internet companies, that stake assumed oversize significance at SoftBank, at one point accounting for nearly 60% of the Japanese company’s net assets.

Then shares of Alibaba and other Chinese internet commerce leaders fell sharply last year after Beijing shifted its stance on the industry. The Chinese government issued fines and opened probes meant to force the companies to adhere more closely to the state’s interests. Mr. Ma disappeared from public view for a time.

Alibaba’s market capitalization peaked at more than $850 billion in October 2020 and has since shrunk dramatically. The e-commerce giant’s market cap stood at around $240 billion as of Tuesday’s close, according to FactSet.

Mr. Ma had long been on the board of Mr. Son’s company, and vice versa, but those relationships ended two years ago, although for now SoftBank retains a seat on Alibaba’s board. And geopolitical tensions between Beijing and the U.S.-led democratic bloc to which Japan belongs have made China connections less desirable for many Japanese companies.

The latest selldown accelerates what had previously been a gradual reduction in SoftBank’s stake in Alibaba over recent years. At the end of 2014, the year of Alibaba’s record-breaking U.S. initial public offering, SoftBank reported a shareholding of more than 32%.

SoftBank said it would “continue to maintain a good relationship with Alibaba.” Alibaba reported the SoftBank transactions in a stock-exchange filing in Hong Kong but didn’t say what it thought of the SoftBank move.

SoftBank said it expected a contribution to pretax income equivalent to about $34 billion as a result of its Alibaba share transactions. The biggest part of that comes from accounting for the remaining Alibaba shares on SoftBank’s books at market value, rather than a lower value that prevailed long ago.

SoftBank has been piling up cash. In its latest financial report released Monday, it said it had a cash position of 4.6 trillion yen, equivalent to $34 billion, as of the end of June, more than twice the ¥1.8 trillion it said it needed to repay its corporate bonds over the next two years.

“We have plenty of cash on hand,” Mr. Son said Monday. “We are strengthening our defenses as promised.”

One key use of SoftBank’s cash has been hefty stock buybacks, which have helped support its own share price even as the market has fallen. It announced additional buybacks valued at the equivalent of up to about $3 billion on Monday.

As of June 30, the Alibaba holding accounted for about one-fifth of SoftBank’s net asset value, SoftBank said.

Write to Kosaku Narioka at kosaku.narioka@wsj.com