All posts by karen.kwok@thomsonreuters.com

IWG SUITORS COULD USE SOME WEWORK MAGIC

WeCompete: Profit, not promises

BY AIMEE DONNELLAN

IWG’s suitors could use some WeWork magic. The original shared-office provider has been approached by three private equity bidders. Though the shares are up 30 percent, its market value is just over last year’s revenue. Trendy upstart WeWork is valued at 20 times its sales. Buyers will be hoping some of the sparkle will rub off.

Mark Dixon, IWG chief executive who created the shared-office space industry, may have found an exit. The company in which he holds a 25 percent stake has received undisclosed cash offers from buyout houses Starwood Capital and TDR Capital; Lone Star Funds has also expressed an interest.

Investors seem keen. The share price rally that began on Friday has added about 700 million pounds to the company’s market value. At 2.8 billion pounds, it is valued at 1.2 times last year’s revenue, and 22 times earnings.

That looks pedestrian when compared with main industry rival WeWork. The privately owned group had become a darling among venture capital investors and entrepreneurs for its cool offices which offer beer kegs and freshly ground coffee. Its equity was valued at $20 billion valuation at its most recent private fundraising – a multiple of more than 20 times last year’s revenue of $900 million.

On that basis the larger IWG, which has 3,000 locations in 114 countries, should be worth more than $60 billion. But the London-listed group is growing much more slowly. Revenue inched up 1.9 percent last year and it was forced to issue a profit warning due to waning demand for its London offices. By contrast, the New York startup’s sales doubled.

A takeover is not certain. Canadian private equity firms Onex Corp and Brookfield Asset Management last year made a joint approach which a Bloomberg report suggested valued the company at 300 pence per share. Those talks fell apart in February.

Both IWG and WeWork are in the business of sprucing up offices and offering them to short-term tenants at a markup. That suggests the yawning valuation gap will eventually close. Prospective buyers will be betting IWG can be made to look more like WeWork, rather than the other way round.

First published May 14, 2018

(Image: REUTERS/Kate Munsch)

IWG DIVIDES TO CONQUER WEWORK DISCOUNT

WeCompete: Profit, not promises

BY ED CROPLEY

IWG is showing the value of self-destruction. Shares in the British office-sharing group soared more than 20 percent on Monday morning after it sold its Japanese business for 320 million pounds. Although still in a different building from younger and trendier rival WeWork, the deal gives a glimpse of the riches hidden behind its workstations.

Founder Mark Dixon realised that companies and people wanted short-term, ready-to-use office space when he launched Regus in the late 1980s. But being first hasn’t translated into being the most valuable. After Monday’s bounce, IWG, as the listed parent company is now known, had a market value of 2.9 billion pounds ($3.8 billion), or 1.2 times last year’s sales. Private WeWork’s most recent valuation of $47 billion is an eye-popping 26 times revenue.

Dixon lacks the financial muscle of Masayoshi Son, whose SoftBank Group is a major WeWork backer. Given the Japanese tech group’s clout in its home market, IWG is probably right to avoid direct competition. But selling its Japanese unit to local rival TKP points to some hidden sparkle in the rest of the business.

The price tag works out at more than 15 times the division’s EBITDA last year. That’s more than twice the multiple that investors attached to the whole of IWG, including 451 million pounds of net debt, before the announcement. Apply the same valuation to the entire group and its equity market value would be 5.6 billion pounds.

IWG’s other businesses, which it also plans to sell, are unlikely to fetch the same juicy price. The Japanese business was more profitable than the overall group last year, with an EBITDA margin of almost 22 percent, against 15 percent for the company as a whole.

But investors are clearly treating the sale of 150 Japanese offices as an appetising sushi starter to the rest of IWG’s businesses, which run 3,250 outlets globally. After stripping out last year’s Japanese earnings and including the cash proceeds, the company now trades at just over eight times EBITDA.

Dixon last year twice called off talks to sell IWG because the price was too low. The latest sale suggests dividing may be the key to conquering the company’s discount.

First published April 15, 2019

RIVALS EXPOSE WEWORK’S LOW DEFENSIVE WALLS

WeCompete: Profit, not promises

BY RICHARD BEALES

WeWork has lofty ideas and low defensive walls. Rival flexible-office provider Knotel just raised $400 million for expansion. Coworking upstart Industrious also pulled in more cash. Investors considering the initial public offering of WeWork parent The We Company can add concerns about the durability of its first-mover advantage to worries about its eye-watering $47 billion private valuation.

Beneath branding that emphasizes technology and a mission to “elevate the world’s consciousness,” what WeWork does is take space in office buildings, make it look pretty, and find sublessees. This “space-as-a-service” idea isn’t new – it’s what the $4.5 billion London-listed IWG has done through its Regus business and other units for years.

Knotel is one competitor focused on providing a similar service for corporate clients. WeWork started by offering space to freelancers and the like, but now 40% of what it calls its memberships are associated with enterprises. Knotel claims more sites than its big-name rival in New York, for example, according to a Bloomberg interview with co-founder Amol Sarva. There’s scope for real competition, even if WeWork is far larger overall.

Another challenger, Industrious, said on Thursday it had raised $80 million of fresh money and expects to be profitable in 2020. Both fundraisings suggest backers see the potential for more than one success in the sector. They may also see more sensibly priced investments – and the potential for earlier profit. WeWork’s operating loss in the first half of this year was $1.4 billion, on revenue of $1.5 billion.

Then there are the SoftBank-backed WeWork’s governance shortcomings. The influence of Adam Neumann, the co-founder and chief executive, is entrenched by supervoting shares, and he has had potentially conflicted dealings with the company – including, bizarrely, being paid nearly $6 million in stock for trademarks associated with its rebranding as The We Company.

Neumann also gets an out-of-whack 169 mentions in the IPO prospectus, as Scott Galloway, a professor of marketing at New York University, observed in a recent blog post entitled “WeWTF.” Cutting through the cultish features, investors are being offered a company last valued at a spacey 14 times its annual run-rate revenue as of June with no end to its huge losses in sight and active competitors. Focusing on that could genuinely elevate their consciousness.

First published Aug. 22, 2019

(Image: REUTERS/Kate Munsch)

WEWORK VALUATION SHRINKS EVEN FURTHER WITHOUT AN IPO

WeCompete: Profit, not promises

BY LIAM PROUD

Adam Neumann is in a bind. The WeWork founder needs to raise at least $3 billion through an initial public offering to unlock another $6 billion of bank credit. But The We Company has shelved its float due to weak demand from investors. Without the cash, growth will dip, potentially pushing the office-sharing startup’s value even lower.

Neumann on Monday effectively postponed an IPO scheduled for this month, stating instead that the company was looking forward to joining the stock market “this year”. The We Company’s valuation has dropped dramatically since largest shareholder SoftBank invested at a $47 billion price tag in January. Reuters reported last week that the purveyor of hip office space was considering an offering that would value the business at $10-12 billion. But even if its Japanese backer stumped up another $750 million, Neumann would have fallen well short of his fundraising target.

The entrepreneur desperately needs the extra $9 billion in equity and debt to fund The We Company’s rapid growth. Though revenue more than doubled last year to $1.8 billion, the combination of negative operating cash flow and heavy capital spending meant the company burned through $2.2 billion. Neumann might need $15 billion of extra cash to pay for office refits, free beer and the like up to 2023, according to a Breakingviews calculator that assumes continued growth.

What if The We Company shelves its growth plans and cuts the red ink? It would then look more like IWG, its dull but profitable peer. The company founded by Mark Dixon has an enterprise value of around 1.4 times this year’s expected sales. Generously assume that WeWork’s 2019 sales reach $3.6 billion, or double last year’s total, and on the same multiple as IWG, it would be worth $5.2 billion, including an estimated $100 million of net debt.

Even that may be a stretch, however, since The We Company is a long way from being profitable, let alone matching IWG’s 15% EBITDA margin. The group says its existing offices earn a 25% “contribution margin”, which excludes expansion costs, overheads and many other non-cash expenses. Generously accept that definition, and assume Neumann stops all marketing spending and cuts overheads in half. In that best-case scenario, EBITDA this year would be $391 million, or 11% of revenue. Put that on IWG’s 9.5 times EBITDA multiple, deduct debt, and The We Company’s equity would be worth just $3.6 billion. In other words, Neumann and SoftBank are in big trouble.

First published Sept. 17, 2019

SOFTBANK WOES GIVE TECH FUNDING RIVALS MORE SPACE

WeRegret: The aftermath

BY GINA CHON

SoftBank’s halo in Silicon Valley is slipping. Masayoshi Son’s firm and its $100 billion Vision Fund have poured billions into startups, sometimes deploying sharp elbows. Trouble at holdings like WeWork may slow it down. That makes more room for rival investors like Sequoia Capital. It’s also good timing for Blackstone’s new growth fund.

SoftBank has changed the game in many ways by investing such large sums. It put about $7.6 billion into ride-hailing firm Uber Technologies and about $11 billion into office sublessor WeWork. Even its smaller investments are still sizable by startup standards, including the $450 million it doled out to real estate firm Compass in 2017.

The money – far more than traditional venture-capital firms were used to providing until Son came along – allows its beneficiaries to spend rapidly to ramp up top-line growth, sometimes sweeping away rivals. Yet there’s a negative side, too. SoftBank has told at least three startups that if they didn’t take its capital it would invest in their competitors, according to people familiar with the discussions.

Now, though, some of SoftBank’s high-profile investments are stumbling. Most notably, WeWork’s planned initial public offering failed to get off the ground, and co-founder Adam Neumann agreed on Tuesday to resign as chief executive. Writedowns or a loss of confidence could end Son’s momentum.

VC firms like Sequoia, Accel Partners and others are in a position to benefit. The Vision Fund’s largesse has inflated valuations and crowded out longer-established players. Now their capital may become more sought-after again.

Newcomer Blackstone is one of few investors that could write a $500 million check, and its broad portfolio and expertise mean it could offer a mix of capital options from equity to debt. Steve Schwarzman’s firm is also the world largest real-estate owner and could offer startups advantages in that realm, among others. Blackstone’s new tech effort is run by Jon Korngold, poached from General Atlantic.

Other private equity firms like Advent International are also getting into tech while some, like TPG, have had a growth fund for years. SoftBank is still a potent factor, but clouds over its portfolio have silver linings for its rivals.

First published Sept. 25, 2019

IPO WANNABES SPLIT INTO CAN’T, SHOULDN’T AND WON’T

WeRegret: The aftermath

BY JENNIFER SABA

When the window for new stocks closes, it closes quickly. Hollywood talent firm Endeavor scrapped its initial public offering on Thursday, and it’s easy enough to see why. Economic signals are worrying, and other new offers have met a frosty reception. Endeavor has unappealing qualities of its own, but at least it has the luxury of being able to wait.

Endeavor was the third company in a short period to test investors’ taste for unprofitable businesses with entrenched founders. WeWork, the office-share company, pulled its own listing after its mooted valuation plunged swiftly, and investors ganged up to oust leader Adam Neumann. Exercise-bike maker Peloton went ahead on Thursday, but its stock is already down around 13% from its IPO price. All three companies have multiple classes of shares, where public investors were being offered the kind with the least votes.

There are differences, however. Endeavor lost $193 million for the six months ended June 30. But the agency run by Ari Emanuel at least has a track record, having subsumed companies with roots dating back to 1898. It may not have fixed assets, like real estate, but it has famous ones – its properties include martial arts brand UFC. That gives it a competitive moat Peloton, for example, lacks. It was raising money to pay down $325 million of debt and make acquisitions, but hardly has the urgency of WeWork, which had lined up bank loans contingent on a successful market listing.

Once fear has set in, it’s likely other IPO wannabes will have second thoughts. The market was already troubled by trade war and political dysfunction. U.S. business investment fell 1% last quarter, while the Conference Board’s regular consumer confidence index plunged in September. Once risk appetite recedes, stock listings end up divided between those that can’t float, those that shouldn’t even be trying, and those with the flexibility to decide it’s better if they don’t. Endeavor can take comfort from being in that third bucket.

First published Sept. 27, 2019