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Rakuten Is Said Cutting Mobile Unit Headcount to Woo Investors

(Bloomberg) -- Rakuten Group Inc. is reducing headcount at its mobile unit and seeking outside investors to help turn around the loss-making business, according to people familiar with the matter.

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The Japanese internet group is in the process of relocating “not an insignificant number” of employees from the mobile division, one of the people said, declining to be named as the matter is private. Rakuten hopes the move will help improve its finances, clean up its balance sheet and attract third-party investors, the person said.

Mounting losses in the mobile division are weighing heavily on Rakuten’s bottom line, souring investor sentiment. The company’s bonds have fallen to near all-time lows on concern that the Amazon.com Inc. competitor will report more losses on Friday. Rakuten is also at risk of a downgrade further into junk territory by S&P Global Ratings.

“We do not comment on rumor or speculation,” a Rakuten spokesperson said, regarding the staff reduction and investor search.

The company previously sought a third-party investor to help finance the struggling mobile business, in an unsuccessful search dubbed Project Atago -- named after founder Hiroshi Mikitani’s favorite shrine, one person said. Bankers had at one point discussed the possibility of a sale of Rakuten’s mobile unit, but no potential buyer emerged, another person said.

Rakuten has been pouring money into the mobile unit since its commercial launch in 2020. But the division still struggles to make headway against bigger rivals NTT Docomo Inc., KDDI Corp. and SoftBank Corp. who together control more than 90% of a saturated market.

One hurdle has been getting rivals to share some of their spectrum in the 900 megahertz band, which enables better connectivity indoors as well as wider network coverage across Japan. If Rakuten remains shut out, the mobile unit could be worthless, one person said.

A Ministry of Internal Affairs and Communications task force recommended earlier this week that the major carriers foot the cost of any transfer of spectrum, should new entrants such as Rakuten win allocation. That process could take more than five years, the task force said, but the news propelled Rakuten shares up 4.5% on Wednesday, in their biggest rise in more than a month.

So far, Rakuten’s bet to win users with ultra-cheap mobile contracts has been costly. The company posted its eighth straight quarterly net loss in April-June, despite double-digit earnings growth from its e-commerce and fintech businesses.

A plan to boost mobile subscriptions by allowing people to use as much as 1 gigabyte of data per month without fees backfired when customers limited their usage to avoid payments. Mikitani scrapped the “zero yen” data plan in May, alienating users. The number of subscribers fell that quarter.

“Rakuten’s earnings hinges on viable mobile strategy,” Bloomberg Intelligence analysts Marvin Lo and Chris Muckensturm wrote in a note last month. “We see low visibility on Rakuten Mobile’s subscriber growth prospects in the near term.”

Rakuten has sought outside investors before, raising 242 billion yen from Tencent Holdings Ltd., Walmart Inc. and Japan Post Holdings Co. to bankroll growth in its artificial intelligence, finance and mobile operations.

Rakuten’s stock price hit its lowest in 12 years in June, maintaining a downward trajectory after hitting a peak in 2015. The company is now also preparing to revamp its e-commerce business and may overhaul its flagship Ichiba marketplace to hue more to the targeted approach favored by Amazon and other competitors, one person said.

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