In September, WeWork was forced to pull the plug on its ill-fated initial public offering. The money-losing co-working company expected a warm reception, yet investors balked at both its corporate structure, which gave founder and CEO Adam Nuemann near total control, and its eye-watering proposed valuation, which topped out at $47 billion in its last private funding round. In an effort to save the IPO, WeWork cut its valuation to $10 billion and ousted Neumann, but the damage was already done.
SoftBank swoops in
With its IPO in ruins and its cash balance dwindling rapidly, WeWork turned to its largest shareholder, SoftBank Group Corp. (TSE:9984), for a lifeline. SoftBank and its Vision Fund had collectively invested $8.8 billion into WeWork. Thus, faced with the prospect of a total loss on the investment, Softbank CEO Masayoshi Son opted to take control of the flailing office management firm.
Even after announcing a further halving of WeWork’s valuation in November, Masayoshi Son told SoftBank investors that he was confident in a rapid turnaround. By the end of 2019, SoftBank had pumped a further $1.5 billion of equity capital into WeWork, and contributed a further $2.2 billion available through the purchase of unsecured notes.
An unusual takeover
In spite of all its travails, SoftBank remained publicly committed to WeWork as it moved into 2020. In December, for example, SoftBank agreed to provide the cash-strapped co-working company with credit support for a $1.75 billion credit facility from Goldman Sachs (GS) and other financial institutions. However, SoftBank’s actions behind the scenes suggested that it was not so confident after all.
In December, even as it was in the process of arranging the $1.75 billion Goldman-backed credit facility, SoftBank was taking great pains to structure its WeWork takeover in such a way as to avoid taking official control, which would force it to consolidate its balance sheet. Thus, while it was willing to take aggressive action to prevent an embarrassing total collapse, SoftBank was clearly unwilling to integrate WeWork fully into its corporate structure.
Pulling the plug on payouts
As part of its takeover arrangement, SoftBank had agreed to buy $3 billion in existing WeWork stock, principally from insiders and institutional backers. Neumann was set to receive $970 million as part of this arrangement. However, on April 2, SoftBank announced that it was pulling out of the agreement, stating that, “Certain conditions to the tender offer were not satisfied.”
According to SoftBank, its withdrawal of the tender will not affect WeWork’s operations, as the chief beneficiaries would have been external investors and former insiders, with very little going to current employees.
Unsurprisingly, Neumann and his confreres are furious. WeWork’s board and management are also upset with SoftBank; on April 7, they sued their erstwhile benefactor. Despite their protestations, however, they will likely find it difficult to find a sympathetic ear for their case in a courtroom. Their case will likely prove even harder to win if WeWork continues to deteriorate financially.
Coronavirus kills the turnaround
At SoftBank’s annual meeting in November, Son displayed great confidence in WeWork’s imminent turnaround. According to the chief executive, WeWork’s new offices were like apples not yet ready to be eaten, and would soon fill up with tenants. “Time will take care of things. We’ll make money once they’re allowed to ripen.”
Unfortunately, the outbreak of the novel coronavirus appears to have killed the fruit on the tree. With offices shut, WeWork’s revenues have collapsed. Meanwhile, it remains on the hooks for massive lease payments to the owners of the properties it manages. While SoftBank remains publicly committed to supporting WeWork, it has made it clear that it will not be receiving further bailouts. Speaking to shareholders in February, Son was emphatic on the subject of “No rescue package.” With that lifeline lost, WeWork may have no choice but to close up shop.
Verdict
Already hurting for cash, WeWork has been thrown into a veritable financial death spiral thanks to coronavirus-induced closures. There does not appear to be a way out of its mess. It now appears very likely to me that the company will not survive the current economic crisis.
Disclosure: No positions.
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