On Tuesday evening, WeWork executives gathered in Los Angeles to hear their chief executive, Adam Neumann, explain the next phase of the group’s development: its rebranding as “The We Company”.
Mr Neumann told a packed hall that the new name, and a shift beyond the core shared office business to create separate units for homes and education, would help fulfil the company’s early vision of creating “something greater than ourselves”.
But behind the expansive language, the private company’s leadership was also dealing with more down-to-earth concerns. SoftBank, its largest backer, had downgraded a planned further investment into WeWork to $2bn, from a figure of $16bn discussed last year.
The scaling down of the Japanese conglomerate’s plans, confirmed by the shared office group on Tuesday, has pushed WeWork executives to consider something they had believed was much further off: an initial public offering.
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It is also a new hurdle for a management team seeking to prove a valuation that has ballooned in recent years: WeWork said the $2bn investment would leave it with an enterprise value of $47bn, including debt. Any listing would see the company launch into a market that is no longer moving ever higher.
“If someone said to us back in July, ‘The market is going to fall 4,000 points and you can raise $6bn and be worth $47bn post-money’, I think everyone would have high-fived each other,” Artie Minson, WeWork’s chief financial officer, told the Financial Times in an interview. “It is a signal of the strength of the company. We feel very good of where we’re at.”
vertical spine chart comparing the sales against earning in $ million from Q1 2017 to Q3 2018. Ast revenue increases so do losses
WeWork has not yet given any timings for an IPO, but executives pointed to a 2018 bond sale as having familiarised markets with the company. WeWork, which has in the past worked with JPMorgan Chase, has readied itself for an IPO, said sources familiar with the matter.
Daniel Ismail, analyst at Green Street Advisors, said: “If you look at the publicly traded office Reits, they are not trading very well . . . If you look at the share prices of Amazon and Netflix, it doesn’t seem like the best time [to float].”
As Mr Neumann reminded his team on Tuesday, WeWork was dreamt up 10 years ago in a Brooklyn meeting of minds between the Israeli-American entrepreneur and his co-founder Miguel McKelvey, a former designer of American Apparel stores.
It now runs 425 locations in 27 countries and is the largest private occupier of office space in both Manhattan and central London.
WeWork’s model — taking out long leases on office buildings which it then rents out on short all-inclusive deals to multiple tenants — is not new; IWG, which runs the Regus brand, has been operating this sort of model for 30 years.
But with their drinks bars, events and Instagrammable interiors, WeWork’s offices proved to have much broader appeal than the drab “serviced offices” that companies had previously used for overspill and travelling staff.
Stacked bar from Q2 2017 to Q3 2018 Showing the increase in WeEWork memberships from about 130000 to over 30000
And because of the levels of investment — SoftBank has committed $10bn since 2017, WeWork said this week — the company has been able to expand aggressively despite mounting losses.
In the first nine months of 2018, losses nearly quadrupled from a year earlier to $1.2bn, on sales of $1.5bn, according to an investor presentation seen by the FT.
Its largest rival, IWG has a market capitalisation just short of £2bn and is profitable, but has had problems with this business model in the past. In 2003, its US business filed for bankruptcy protection after the end of the tech bubble left it lacking tenants, but still committed to long leases.
Nonetheless, Mr Minson said last year WeWork would be “short-sighted” to slow growth in pursuit of turning a profit. It has also been prepared to pay for market share: in 2018 it offered tenants up to a year’s free rent if they switched from a competitor.
One rival said: “Don’t underestimate the founders — they have an extraordinary talent for raising money. But as business models go, it is very peculiar.”
SoftBank and its Saudi-backed Vision Fund have become some of the largest backers of private companies, helping to set record valuations. The proposed $16bn investment in WeWork would have been the largest ever in a start-up.
The declining price of WeWork seven-year bonds from May 2018 to Jan 2019, from 100% to 90%
WeWork bonds have unwhelmed investors
But the relationship has caused controversy within SoftBank. On several occasions, senior executives have questioned WeWork’s valuation and raised concerns that it has little to do with the Vision Fund’s intended focus on technology.
A $4.4bn investment last year, which required major backing from the Vision Fund, involved two SoftBank executives joining WeWork’s board. However, in recent months, investors in the Vision Fund have expressed concerns about the proposed new $16bn commitment.
That deal would have required SoftBank to involve the Vision Fund, leverage the company’s own assets and raise money from a syndicate of outside investors, according to a person with knowledge of the plans.
It is unclear whether SoftBank, which is heavily indebted, walked away from this deal because it did not have the resources to pursue it.
Shares in SoftBank had fallen by a third over the past three months until the scaled-back WeWork investment was revealed, prompting a 7 per cent rise since Monday.
By contrast, the news weighed on the price of WeWork bonds issued in 2018. The price of the $702m of borrowing, which must be paid back in full in 2025, tumbled to an all-time low of 86 cents in the dollar, according to bond trading platform MarketAxess.
The $2bn of equity investment from SoftBank will enable WeWork employees and existing investors to cash out a total of $1bn for about $54 a share, said two people familiar with the deal.
A further $1bn will purchase new equity at about $110 a share, giving the company an equity valuation of $42bn.
The unusual structure, with two separate valuations, is similar to the way SoftBank invested in Uber in 2017, and underlines the extent to which WeWork’s latest valuation is underpinned by the Japanese company.
WeWork does have other investors. Singapore’s Temasek and China’s Hony Capital backed a $500m fundraising for its China business last year. But few investors have the firepower of SoftBank, which has dominated recent funding rounds.
“They have reached a point where they need each other,” said Alex Snyder, senior analyst at real estate investment group CenterSquare. “SoftBank could continue putting money in to fuel WeWork’s growth in order to justify the money they’ve already put in.”
Mr Ismail said WeWork “still has quite a bit of cash to expand”.
Figures issued in November showed $6.4bn of cash and cash commitments.
But if SoftBank reduces cash injections in future, the office group’s options include “hunkering down to focus on their core business, or seeking other sources of capital such as joint ventures”, said Mr Ismail.
The all-encompassing vision for The We Company comes with a “risk of mission creep”, he added.
A person close to WeWork’s plans said the decision to split into three core units could provide extra flexibility if the company does require further capital this year.
It will give the group the ability to float a single unit without the constraints of other lossmaking divisions that are hoovering up capital, while also making it easier for individual units to make separate deals, the person said.
Stockholding employees gathered in Los Angeles this week will now need to decide whether to cash out at a valuation of about $20bn, wait for another tender offer or hold out for a successful IPO.
Mr Snyder said the company would be unlikely to proceed at a price substantially lower than SoftBank’s valuation. He added that any IPO may win support from stock market investors “willing to swing for the fences”.
“People like the chance of a home run, even if the expected return after accounting for the risk involved might be lower than just buying a plodding utility.”
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