Wework and Softbank: helical horror show

Proliferating spirals drive a community mad in classic horror manga Uzumaki. Softbank boss Masayoshi Son should take note. Wework, a favoured investment of the Japanese tech group, is spiralling towards destruction. Softbank has proposed a rescue valuing the equity of the US flexible offices business at $8bn, compared with $47bn in a recent financing. Such “down rounds” could leave Softbank, a company with a risky financial structure, spinning in ever-decreasing circles too.

It has proposed a $9.5bn package of debt and equity that would raise its stake in Wework to up to 80 per cent. Softbank has two aims: to avoid or postpone a writedown and to halt the drop in Wework’s worth. Lex valued the company at no more than $3bn last summer, when bankers were readying figures of up to $104bn.

At a $8bn valuation the loss attributable to the Softbank group would be $3.6bn, according to Bernstein. This would consist of a $2.2bn hit on a direct investment and 51 per cent of a $2.8bn loss on the Vision Fund’s stake. Softbank can probably forestall a writedown almost as large as its annual net income.

Read also; Wework bonds drop to new lows as investors weigh refinancing

Thebelttosoftbank’sbracesisa$5bn funding package proposed by JPMorgan Chase. Convincing wary debt investors will be tricky.sky-high yields are needed to compensate for risk.

Wework’s founder Adam Neumann would lose control. Dual-class shares would disappear. Marcelo Claure, Softbank’s chief operating officer, would become chairman.

Wework is estimated to be burning $2.8bn a year. The only way to extend its survival while it tries to make a profit on limited funds is to cut costs. This would be at the expense of growth, further diminishing its valuation. This is about to become Softbank’s problem to solve.

The toxic legacy is well deserved. Softbank’s willingness to buy into glitzy propositions helped propel valuations for tech companies – some of them worthier of investment than Wework – to unsustainable levels.

The dip in valuations – notably at Uber, Slack and Wework – could create big problems for Softbank. The group’s real cashflow is slim. Its historic profits have been underpinned by revaluations and a share of paper profits at companies in which it invests. Its own investors have only tolerated its heavy gearing because its investments were rising. Wework shows Mr Son how painfully such spirals unwind.