All posts by o.tas

WEWORK OFFERS CONVINCING CASE TO AVOID ITS IPO

WeFlop: The IPO debacle

BY ROBERT CYRAN

WeWork’s parent, The We Company, has provided one of the most convincing cases for avoiding an initial public offering since the debut of Snap two years ago. WeWork’s IPO may even be worse – and this is before considering valuation.

The shared-office provider’s 359-page prospectus has something for everyone to dislike: a convoluted ownership structure, reams of related-party transactions, conflicts of interest, absurdly bespoke estimates of addressable markets and an overlay of inspirational tech gibberish. Easiest to loathe is WeWork’s continued massive cash burn.

Like Snap, whose shares trade below their 2017 IPO price, prospective investors in WeWork are being offered little say in how the company is run, thanks to three classes of stock with insiders holding B and C shares carrying multiple voting rights. Its organizational structure is a Christmas tree of subsidiaries, joint-ventures and an acquisition and management platform.

The muted voice for investors is a problem compounded by potential conflicts of interest laid out in 11 pages explaining related-party transactions. Chief among them: WeWork leases space in buildings owned by co-founder Adam Neumann and other directors. WeWork says it may enter more of these in the future. Underwriters UBS, JPMorgan and Credit Suisse have provided Neumann with a $500 million line of credit, with shares provided as collateral, of which he has tapped about $380 million.

WeWork dangles two shiny lures to new investors. The first is the sort of inspirational language seen on cat posters: “We dedicate this to the energy of we – greater than any one of us but inside each of us.” The second tactic, of estimating a total opportunity in 280 targeted cities worldwide of $3 trillion is probably less believable. To put that in context, it’s equivalent to about 15% of America’s GDP.

What’s inarguable is the juvenile firm’s ability to lose money. Revenue in the first six months of 2019 almost doubled to $1.5 billion from the same period last year. But operating losses grew even faster, from $678 million to $1.4 billion. Easy money and economic growth since its 2010 founding have allowed WeWork to expand this fast while burning through cash. In that sense, WeWork is a poster child of the longest U.S. economic recovery on record, and an era where money is virtually free. Caveat emptor.

First published Aug. 14, 2019

(Image: REUTERS/Brendan McDermid)

WEWORK GOVERNANCE FIXES HIGHLIGHT THE UNFIXABLE

WeFlop: The IPO debacle

BY RICHARD BEALES

WeWork isn’t entirely unconscious when it comes to its own governance. Adam Neumann, co-founder and chief executive of the shared-office group that is readying an initial public offering, has handed back $5.9 million he was paid by the company for trademarks. And the company has finally hired its first woman director, Frances Frei. Yet such easy repairs only underline its harder-to-reach problems.

The fixes are noted in the latest draft prospectus for the IPO of the business also known as The We Company, filed on Wednesday. They’re steps in the right direction. For potential investors, though, there are far larger concerns – especially since Neumann and his backers will presumably set a valuation higher than the last private-market figure of $47 billion once they indicate a target range.

Start with structurally poor governance. Neumann’s control is entrenched by three classes of stock distributed so that insiders have 20 votes per share while IPO investors get just one. That’s fine until WeWork hits a pothole, or Neumann indulges in a bigger version of the egregious and now-reversed trademark deal, at which point regular shareholders will regret their powerlessness.

Then there is the red ink: In the first half of 2019, WeWork reported an operating loss of $1.4 billion on revenue of $1.5 billion. This is coupled with negative operating cash flow and investments in property, equipment and software that soaked up $1.5 billion in liquid funds in the same period. Even several billions of cash, and more billions of possible IPO proceeds, won’t last long at that pace.

Meanwhile, WeWork had $47 billion of undiscounted obligations under signed leases at the end of June. These run 15 years on average, the company says, equivalent to $3.1 billion a year. Yet in June, the enterprise was only making run-rate annual revenue of $3.3 billion, which doesn’t leave much to cover other costs or cushion a downturn.

That’s simplistic of course – and part of the problem is that The We Company isn’t simple. Its numbers remain too complicated to show a path to sustainable profitability. Neumann says his mission is to elevate the world’s consciousness. He could start by elevating understanding of how he’ll eventually make money.

First published Sept. 4, 2019

WEWORK IS WILTING UNDER PUBLIC SCRUTINY

WeFlop: The IPO debacle

BY ROBERT CYRAN

WeWork is wilting under public scrutiny. The office-sharing firm, which is now officially named The We Company, may slash its initial public offering valuation to less than half the $47 billion of its last funding round. That would demolish management credibility, and still be excessive given its conflicts of interest, cash burn and unproven business model.

Valuing a tech-tinged real estate company with rapid growth and massive losses has always been a bit chimerical. Japan’s SoftBank invested $2 billion into WeWork in January, some of which was at a $47 billion valuation. By that standard, seeking an IPO valuation as little as $20 billion is a huge comedown. Yet that would be in line with the $21 billion worth set by a previous funding round in 2017. The trouble is even the new low figure may be too high.

Sure, WeWork is growing quickly, with revenue doubling to $1.5 billion in the first six months of this year from the same period last year. But operating losses grew even faster, to $1.4 billion. Deliberately slowing growth might turn its negative EBITDA positive, and let cash begin to flow, but that’s uncertain. Rival IWG is valued at only 10 times EBITDA over the last 12 months. By that yardstick, even a generous adjustment of WeWork’s negative EBITDA would struggle to justify a valuation of much more than $15 billion.

Other aspects of WeWork are just as unappealing, such as its renting of buildings part-owned by Chief Executive Adam Neumann. The firm’s business model of leasing buildings and subleasing space may suffer in a downturn. And IPO investors will have little say in how the firm is run, given insiders control of supervoting stock.

It’s worth asking why the company is even trying to go public. This is a capital-intensive business. In addition to operating losses, WeWork had over $2 billion in capital expenditure last year. Neumann has already tapped private investors worldwide, and $6 billion in debt financing is contingent on doing an IPO. As if that isn’t enough to give investors pause, slashing the valuation means the company will raise less cash unless insiders surrender more equity.

Until WeWork can show it is managed responsibly and has a path toward profitability, it’s better suited for more forgiving private investors.

First published Sept. 5, 2019

(Image: REUTERS/Mark Makela)

WEWORK FOUNDER’S STRONG HAND GETS RAPIDLY WEAKER

WeFlop: The IPO debacle

BY LIAM PROUD

Supervoting shares don’t create great corporate leaders – and they don’t save weak ones. Consider Adam Neumann’s rapidly eroding grip over The We Company, the office-sharing group he co-founded. When a company is in need of cash, it’s providers of capital that call the shots.

The 40-year-old Neumann’s main financial backer, SoftBank, is exploring ways to oust him as chief executive, Reuters reported on Sunday. The Japanese technology investor and its affiliates including the Vision Fund have poured almost $11 billion into the office sublessor – most recently at a $47 billion valuation. Those investments are underwater, with even a cut-price $10 billion initial public offering failing to entice demand. It might help to remove Neumann, whose tight control over the company and erratic behaviour were a turnoff for investors.

On paper, he has the power to resist. The We Company’s IPO filing shows Neumann owns all of the outstanding Class C shares, which each have 10 votes, and also effectively controls the votes attached to shares held by We Holdings, which also has supervoting shares. SoftBank, along with venture-capital group Benchmark and JPMorgan, owns single-voting Class A shares, according to the filing. Even if they teamed up, the trio would have roughly one-seventh of Neumann’s voting power.

In reality, SoftBank and its boss, Masayoshi Son, hold the whip. The We Company burned through $2.2 billion of cash last year. At that rate, his current $2.5 billion cash pile will need to be replenished by the middle of 2020. Neumann has no obvious alternative to Son, who is one of a few venture capitalists willing to write multibillion-dollar cheques. The We Company’s bankers offered up to $6 billion of bank credit, but made it conditional on it raising $3 billion in an IPO. Its high-yield bonds were trading below their face value on Monday.

The upshot is that Neumann is boxed in: he could fight SoftBank, for example by calling a shareholder vote and dismissing the Japanese group’s appointed director Ron Fisher. Neumann would risk being left at the helm of a company with barely enough resources to last a year. Acquiescing to SoftBank would be humiliating; digging in, if Neumann finds his job is on the line, would be downright counterproductive.

First published Sept. 23, 2019

WEWORK’S NEUMANN MOVES FROM PENTHOUSE TO BASEMENT

WeFlop: The IPO debacle

BY ROBERT CYRAN

WeWork’s goal to occupy the airy penthouse of corporate finance hasn’t gone to plan. The office-sharing startup, led by high-profile co-founder Adam Neumann, had hoped to be valued at more than $47 billion in its initial public offering. Now Neumann is stepping down as chief executive, adopting a non-executive chair position, and giving up voting control. An IPO in the foreseeable future looks highly unlikely. From here the company’s drama will mostly play out in private, which is where it belongs.

Investors like Japan’s SoftBank ought to have realized long ago that Neumann was an inappropriate leader for a listed business. His claims that the firm’s valuation was based in part on spirituality and energy, his variable focus on investing in everything from elementary schools to wave pools and his many related-party conflicts would have been problematic even in a company that wasn’t burning cash. The firm’s valuation has imploded, to about a fifth, or perhaps less, of its last funding round.

Having Neumann step down and relinquish majority control is necessary, but insufficient. The firm needs more capital – perhaps $15 billion by 2023 according to a Breakingviews calculator – and proof its business can be profitable. It also needs to find a new permanent CEO who can work with Neumann as their non-executive chair. Given the turmoil and uncertainties, Neumann’s demotion may be enough to secure more capital from backers. But having caught a glimpse of the penthouse, the metaphorical equivalent of a windowless basement must be even harder to bear.

First published Sept. 24, 2019

(Image: REUTERS/Eduardo Munoz)

CASH INCINERATOR WEWORK COULD STALL WITHOUT AN IPO

WeRegret: The aftermath

BY LIAM PROUD

Breakingviews calculator: How much cash will WeWork burn?

Pity Adam Neumann. Mere months ago the WeWork co-founder’s bankers touted a $65 billion public-market value for the office sublessor’s parent, according to news reports. Now his biggest backer, Japan’s SoftBank, is urging him to scrap an initial public offering that may peg The We Company’s worth at less than $20 billion, according to the Financial Times. The problem is that WeWork may not last long without the proceeds of an IPO.

SoftBank and its affiliated Vision Fund have pumped almost $11 billion into Neumann’s company. It has probably marked up those holdings, having invested most recently at a $47 billion price tag. Writing the shares down by more than half after a cut-price IPO – and perhaps also being heavily diluted by newly issued shares – would be embarrassing for Chief Executive Masayoshi Son while he is raising Vision Fund 2.

For WeWork, however, a non-listing could be disastrous. Neumann’s fast-growing business relies on having a huge pile of cash to spend on office refits, couches, beer taps and the like, as well as on deals to bring in new tenants. Last year sales more than doubled to $1.8 billion. But negative operating cash flow and hefty capital expenditure dragged free cash flow to minus $2.2 billion.

Neumann needs IPO proceeds of at least $3 billion to unlock bank credit of up to $6 billion, according to the company’s IPO filings. He had nearly $2.5 billion of cash on hand at the end of June, but at WeWork’s breakneck pace of investment that won’t last long.

Even with $9 billion more available, he may run out of cash within five years, according to a new Breakingviews calculator. Assume revenue growth declines to 30% by 2023 from just over 100% last year, and that operating cash flow matches profitable peer IWG’s 19% of revenue by the same date. Finally, assume Neumann reduces capital expenditure as a percentage of revenue to IWG’s 17% from WeWork’s 113% in 2018. WeWork will still incinerate $15.4 billion of cash from 2019 to 2023. That leaves a $4 billion shortfall even after allowing for IPO and debt proceeds – and that’s a generous set of assumptions.

Could SoftBank plug the gap if an IPO doesn’t happen? That’s unlikely, since the Vision Fund’s investors vetoed a bigger investment last year, and even Son’s parent company probably can’t cough up more than $10 billion. WeWork looks to be incinerating cash faster than it can be replaced.

First published Sept. 10, 2019

AIRBNB MAY BE EVERYTHING WEWORK ISN’T

WeRegret: The aftermath

BY ROBERT CYRAN

If there’s a company WeWork wishes it were, it could be Airbnb. The office-sharing firm’s initial public offering has been postponed because investors took a look at the underlying business, as well as the company’s governance, and decided they wanted none of it at anything like the company’s $47 billion private-market valuation – or indeed at half that, or less. Although Airbnb is another overgrown upstart in the space-sharing business, its initial public offering, targeted for 2020 according to the company on Thursday, may succeed in many of the ways WeWork’s is failing.

Airbnb, which connects travelers with vacation homes and rooms for rent, was valued at over $30 billion in a private fundraising back in 2017, according to news reports. And as a prelude to confirming its listing plans, it said this week that second-quarter revenue was well over $1 billion. The company said previously it had positive EBITDA in 2017 and 2018.

That statistic is Exhibit A for why the public offering of the company run by Brian Chesky could go far better than WeWork’s. The latter, led by Adam Neumann, has a voracious appetite for cash to spend on leases, fixing up offices, and attracting customers. It lost over $500 million at the EBITDA level last quarter on revenue smaller than Airbnb’s.

Investors have taken fright at the absence of a trajectory towards profitability, partly because WeWork lacks significant economies of scale and faces lots of potential competition. There’s also a surfeit of red flags surrounding governance.

Airbnb simply has a better business model with real benefits of scale. It is genuinely asset light, collecting fees as owners rent out and maintain their own real estate. There are a few online competitors such as Expedia’s VRBO, and hotel chains such as Marriott International are trying to muscle in. But like, say, Facebook, Airbnb benefits from network effects: Travelers want to go where homes are listed, and vice versa.

All this adds up to growth with minimal need for capital. The company has only raised $4.4 billion in total, according to Crunchbase. WeWork has raised over three times as much from backers including SoftBank. That means Airbnb can afford to wait for its IPO – and that’s a much more appealing pitch than WeWork’s overvalued desperation.

First published Sept. 19, 2019

(Image: REUTERS/Gabrielle Lurie)

JPMORGAN SHARES TOO MUCH SPACE WITH WEWORK

WeRegret: The aftermath

BY GINA CHON

Japan’s SoftBank isn’t the only firm with outsized investment connections to WeWork. JPMorgan has helped line up a giant loan for the office sublessor and lent hundreds of millions of dollars to Chief Executive Adam Neumann. Funds advised by the bank are also one of the largest investors in parent The We Company. With the firm’s planned initial public offering increasingly in doubt, that’s looking less and less smart.

Jamie Dimon’s bank has hung jackets on a lot of WeWork’s chairs. Mostly through clients of its asset-management arm, JPMorgan entities collectively have more than a 5% stake in the company, according to its latest draft prospectus. That makes the U.S. lender one of the top non-insider shareholders. It participated in four fundraising rounds, according to WeWork’s filing, with the last effort valuing the company at around $16 billion in 2015.

That may have helped JPMorgan land a lead IPO underwriting role, along with Goldman Sachs, whose affiliates are also WeWork investors. Furthermore, JPMorgan is part of a group of banks that have offered a $6 billion credit facility to WeWork, conditioned on its IPO raising $3 billion. Neumann decided this week to postpone the offering after indications that it would fall short of that target.

Then there’s the colorful, controversial CEO himself. JPMorgan and other banks extended a $500 million personal credit line to Neumann, secured on his shares in The We Company. Dimon’s firm separately provided him with mortgages and other loans totaling almost $100 million.

The company says it still plans to go public in 2019. But investors have already balked at anything like its $47 billion private-market valuation earlier this year, with news reports suggesting possible targets as low as $10 billion.

It’s typical for banks to provide multiple services to a hot new client. JPMorgan was among the lenders that did business with Facebook before landing a lead underwriting role for its 2012 IPO. Not all such bets pay off, though. SoftBank and its Vision Fund are in much deeper. And JPMorgan may still have cushion for both its credit and equity exposures. Even if so, it’s a lot less well stuffed than it seemed just weeks ago.

First published Sept. 19, 2019

SOFTBANK RISKS CHASING ITS LOSSES WITH WEWORK

WeRegret: The aftermath

BY LIAM PROUD AND ROBERT CYRAN

Bad gamblers chase their losses all the way to financial oblivion. SoftBank Chief Executive Masayoshi Son risks making the same mistake with The We Company, the cash-burning shared-office firm into which he’s already poured, or promised, almost $11 billion.

Son’s Japanese tech conglomerate is in talks to increase an agreed investment in the startup more commonly known as WeWork, from $1.5 billion to $2.5 billion, the Financial Times reported. SoftBank would get the right to receive shares in the future at a lower valuation than had been previously agreed.

Since WeWork’s mooted worth has already fallen from $47 billion to one-fifth of that, all this may sound like throwing good money after bad. WeWork burned almost as much cash last year, according to documents filed in conjunction with its failed IPO, as Son is pondering investing. Son perhaps hopes that WeWork will regain its footing with time, and new leadership, after founder Adam Neumann was ousted as chief executive on Tuesday.

There’s some logic to that. An equity injection from SoftBank may unlock another $3 billion to $4 billion of bank loans. And backers can extract favourable terms injecting capital into viable businesses desperate for cash. Venture firm TCV, for example, invested in Netflix in 1999 and led a 2001 recapitalisation of the company after the dot-com crash. Netflix survived, and thrived. The video-streaming firm now has a market capitalisation of $115 billion.

The snag is that SoftBank may have other drivers than financial returns. Walking away from WeWork would dent the reputation on which the Japanese firm depends for attracting new investors and promising firms into its orbit. Other startups might fear SoftBank will back off during hard times.

This is unlikely to be the last difficult decision SoftBank faces over WeWork. The company has shown it can grow, but not that size has any value, or brings profitability in an industry where others already do similar things. Rival IWG is valued at about 3.7 times trailing revenue, and on the same multiple WeWork would be worth a bit more than $8 billion – less than SoftBank has put in. Son, like WeWork’s tenants, has other places he can hang his hat.

First published Sept. 26, 2019

(Image: REUTERS/Thomas Peter)