Wework to merge with blank check firm
Though Wework has long lost billions of dollars, it always found ways to attract huge investments from deep-pocketed investors. Now, less than two years after it was rescued from a collapse, the coworking company has found yet another backer willing to overlook its losses.
The company announced Friday that it had agreed to merge with a blank check company in a deal that would give it a listing on the stock market it was denied when it was forced to shelve an initial public offering as investors questioned its financial strength and governance practices.
Instead of a traditional IPO, Wework is merging with Bowx Acquisition, a company listed on the stock exchange for the sole purpose of buying a business, in a type of deal that has become hugely popular in recent months. Investors, bankers and even celebrities and athletes have rushed to float such special purpose acquisition companies, or SPACS, because they offer their creators a chance to mint huge profits relatively quickly. And merging with these vehicles is attractive to companies such as Wework because they provide an express lane onto the stock market without the obstacles that scuttled Wework’s public offering in September 2019.
“There have been doubts raised about its business model, and those doubts may be difficult to address in an IPO roadshow,” said Michael Klausner, a Stanford business professor, referring to the presentations that companies give to mutual funds, pension mangers and other institutional investors before a public offering. SPACS are
“highly problematic” because their structure can encourage buyers to overpay, hurting shareholders in return, he said.
As of Wednesday, 295 SPACS had gone public in 2021, raising $93 billion and breaking last year’s record in a matter of months. Because so many of these companies are now out there, some have tried to use star power to get businesses to entertain their merger offers. Bowx has its own star connections; it is backed by Bow Capital, an investment firm that counts former NBA great Shaquille O’neal as an adviser.
Many SPAC mergers involve companies that make things such as electric vehicles or rockets but have little or no revenue. Their primary sales proposition to investors is that the business being acquired has a revolutionary technology that will change their industry or even the world.
Wework, however, has a familiar product that investors can evaluate. The company leases office space and then effectively sublets it to its members, which include individuals, startups and large corporations. Its heady expansion was fueled by Japanese conglomerate Softbank, which became Wework’s largest shareholder and rescued the company in 2019 just as it was about to run out of cash.
Wework said the deal with Bowx gave it an equity value of $7.9 billion, far less than the nearly $50 billion value its investors placed on the company in 2019. Wework will receive $1.3 billion in cash from the deal, including $800 million from Insight Partners, Starwood Capital Group, Blackrock and other investors.
“It’s now, more or less, a normal real estate company,” said Jay Ritter, a finance professor at the University of Florida, drawing a distinction to the technology company that Wework pitched itself as just a few years back. And it will have to perform at least as well as a conventional real estate business, Ritter added.
“With real estate and the shortterm rental market — there’s a competitor that’s been out there for a long time,” he said. “And investors aren’t going to buy unrealistic projections.”
The pandemic has emptied Wework’s offices — memberships fell to 476,000 last year from 619,000 in 2019 — and it is not clear how much demand there will be for its office space in the future. Many people have become used to working from home, and some large employers such as Target and Dropbox have said they plan to give up big chunks of office space because they expect fewer employees to come in daily. Retailer REI sold its headquarters altogether.
Still, Bowx CEO Vivek Ranadivé told CNBC on Friday that the pandemic would be a “tail wind” for the office-sharing company.
“Companies have now decided that flex space is the must-have,” said Ranadivé, a technology entrepreneur who owns the NBA’S Sacramento Kings. “Maybe for their own headquarters they want to own that space. But for everything else, they want to hand it over to a Wework.”
In large part because of that idea of corporate desire for flexibility, Wework says its revenue will surge in the coming years. The company also says it has lowered its costs since the failed public offering, and it offered a bullish forecast of earnings before interest, taxes, depreciation and amortization, an often flattering measurement of cash flows.
But Wework did not say what its profit might be. A presentation released Friday said the company lost $3.8 billion last year, about the same as in 2019.
“We looked at our plan, we see what we accomplished in 2020 — and we’ve seen a path to profitability — and we thought it was a good time to raise additional liquidity,” Wework CEO Sandeep Mathrani told CNBC on Friday.