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John Engle
John Engle
Articles (406) 

WeWork May Pull the Plug on Its IPO

The co-working unicorn has faced unexpected skepticism and pushback from potential investors

September 06, 2019 | About:

The We Co.'s initial public offering roadshow has evidently gotten off to a disappointing start. A bloated valuation has been met with considerable skepticism, while fears about poor corporate governance have deepened in spite of the company’s recent efforts at damage control.

WeWork (as the company is most widely known) responded to this lukewarm initial reception with a steep cut to its target valuation. But even that may not be enough to salvage its teetering IPO.

About that valuation

WeWork initially hoped to go public with a valuation of $47 billion, the same valuation it received during its last private funding round earlier this year. No one at WeWork has offered much in the way of concrete financial metrics by which to judge its valuation. As we have discussed in a prior research note, even CEO Adam Neumann seems confused about it much of the time. In 2017, Neumann offered this rather unusual take:

"No one is investing in a co-working company worth $20 billion. That doesn't exist. Our valuation and size today are much more based on our energy and spirituality than it is on a multiple of revenue."

Even before its private valuation more than doubled during the subsequent 12 months, Neumann understood the company was grossly overvalued based on its industry and business model. Yet, he evidently came to believe that even if he did not understand the valuation, the market would still buy into its IPO.

Alas, it seems reality has set in a bit too soon for WeWork. After failing to garner much investor interest for a $47 billion valuation, the company has been forced to lower its expectations. On Sep. 5, WeWork announced target IPO pricing that would imply a valuation between $20 billion and $30 billion. That means, right out of the gate, WeWork is planning for a valuation nearly halved from its last private funding round, at best. That bodes ill for the company’s private backers, even if it lets a bit of air out of a wildly inflated bubble.

Having second thoughts

With the market responding coolly to its initial overtures, WeWork’s decision to respond with a price target cut made perfect sense, even if its magnitude was rather staggering. Of greater interest is what has been happening behind the scenes in the meantime.

With a successful IPO still not a certainty, even with a slashed valuation, WeWork has started mulling alternatives. Neumann has reportedly met with Masayoshi Son, CEO of Softbank Group Corp. (TSE:9984), in an effort to work out a contingency plan:

“An IPO in the coming weeks no longer seems like quite so sure a thing. WeWork chief executive Adam Neumann visited SoftBank counterpart Masayoshi Son last week to discuss a potential investment of $3 billion to $4 billion that would allow WeWork to delay its offering into 2020.”

Essentially, WeWork hopes Softbank will either take a big position in the IPO to support the share price and shore up demand or provide a similar amount of private funding that will allow the company to remain private into next year.

Read more here:

A test of market cynicism

Pulling an IPO mere weeks before a planned debut is not unheard of, but it is certainly unusual. The fact WeWork is even countenancing the possibility of pulling the plug on its IPO is a serious red flag. Indeed, it stands out from the parade of red flags that have emerged in the run-up to the stock's debut.

While a radical move, staying private would allow WeWork to avoid the punishing glare of public scrutiny for a while longer. Given the apparent absence of any significant bullish analysts or market influencers, it almost sounds like it might not be a bad idea, from insiders’ perspectives anyway. Rett Wallace of Triton Research recently offered an assessment of the situation that is both compelling and cutting, comparing WeWork's remarkable lack of analyst support to other money-losing enterprises like Snap Inc. (NYSE:SNAP) and Lyft Inc. (NASDAQ:LYFT):

“I’ve heard no bullish views at all.There were Uber bulls, there were Lyft bulls, there were Snap bulls. WeWork is exhausting people’s cynicism.”

While calling off an IPO this month may allow it to try again another day, it merely delays the inevitable. In fact, given the increasingly precarious macroeconomic environment, a delay now could prove very costly to WeWork if conditions worsen.

Verdict

Ultimately, whether it ends up going public this month or delays to next year, prudent investors will steer clear of WeWork.

Disclosure: No positions.

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About the author:

John Engle
John Engle is president of Almington Capital - Merchant Bankers. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin and an MBA from the University of Oxford.

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