WeRegret: The aftermath

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)

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