Shared workplace business WeWork is in deep water after a reversal of fortunes. Could a bailout by SoftBank Group help stave off bankruptcy?
by Bethan Rees
Japanese multinational conglomerate SoftBank Group has agreed to take over US commercial real estate company WeWork – known for its shared workspaces – and has committed to more than US$13bn in equity to WeWork, which is now valued at US$8bn, report Anirban Sen, Jessica DiNapoli and Jane Lanhee Lee for Reuters.
They write that SoftBank Group is WeWork’s largest shareholder and is “doubling down on an ill-fated investment”, giving WeWork’s co-founder and former CEO Adam Neumann a US$1.7bn payoff to give up control of the firm. “To stem WeWork’s bleeding, SoftBank will need to reverse its widening losses and find a way to make it profitable,” they write.
This comes after WeWork abandoned plans for an initial public offering (IPO) in September 2019, following a valuation of US$47bn in January. However, investors questioned its losses and business model under Neumann, and the IPO was cancelled. Neumann then resigned as CEO.
The article refers to a ‘source’ that says that Neumann has the right to sell US$970m of shares as part of a tender offer whereby SoftBank could buy up to US$3bn in WeWork shares from existing investors and employees at US$19.19 each. SoftBank will, according to one of the sources referred to, also give Neumann a loan of US$500m to repay a credit line from JPMorgan Chase & Co, but should also use the proceeds from selling his stock to repay the loan.
According to another source referred to in the article, SoftBank will own 80% of WeWork following the tender offer, but won’t consolidate the company on its books because it doesn’t hold a majority of voting rights.
Reuters article
A work of fiction
When WeWork accepted a valuation of US$47bn and readied for an IPO in September, it should have realised it was heading for failure. According to Alex Sherman for CNBC, SoftBank’s investments pushed the valuation from US$17bn to US$47bn, and in hindsight, perhaps Neumann should have turned down the inflated valuation.
“When Neumann took investments from SoftBank in November 2018 (US$3bn) and January 2019 (US$2bn), WeWork’s value skyrocketed from US$20bn to US$47bn. In other words, SoftBank’s investment set WeWork’s value [US]$27bn higher than it had been,” Sherman writes.
Sherman reports that Neumann “failed to deliver for his employees and other investors by selling too much of WeWork to SoftBank at too unrealistic a price”, and as a result, he lost control of his company, stepping down as CEO. This fictional valuation sent WeWork on the path of an ill-advised IPO.
Prior to SoftBank’s investment impact in 2016, WeWork’s valuation was at US$16.9bn, Sherman says. He argues that if the company had “topped out” at that valuation instead of US$47bn, the company would be trading publicly today.
CNBC article
Lessons to be learnt
In an article for Investment Week, David McFadyen, investment manager, high yield at Kames Capital, reports on what we can learn from WeWork’s struggles. “A margin of safety is a wonderful thing for a company,” he writes, “it gives us confidence that companies can overcome challenges and therefore confidence to buy or hold on to investments when times are tough”.
McFadyen writes that sometimes bondholders will see an ‘equity cushion’ as a margin of safety. “Of the total valuation of the company, how much is equity versus debt? The theory goes that if a company has a significant amount of equity value relative to its debt then bondholders are protected – the equity market will support the company. This is dangerous,” he writes.
Using the example of WeWork, he says the company has an “undue reliance on the massive equity valuation of the company”, due to SoftBank. WeWork’s valuation was not as hoped as it prepared for an IPO and it was withdrawn. “The equity cushion was vaporised, and so was the supposed bondholder margin of safety,” says McFayden
His key message is to not rely on the “benevolence of equity owners” as a basis for an investment decision. “Equity cushions exist … until they don’t,” he concludes.
Investment Week article
What action do you think WeWork should've taken? Leave your comments below.
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