Assif Shameen: The rise, fall and re-rise of WeWork
What do you do if you try and fail at something grandiose like “elevating the world’s consciousness” through leased office space? You might remake yourself, even don a new garb and pray that the rework works. Just 18 months after it abruptly pulled its initial public offering that would have valued it at over US$47 billion, office-sharing startup WeWork is attempting to come back from the dead. It is once again aiming to become a publicly-listed firm, this time as a merger target for a blank-cheque special purpose acquisition company (SPAC) with a more modest US$9 billion ($12.1 billion) price tag.
SPACs are shell firms that raise funds in an IPO with the objective of merging with an unidentified private entity. For the firm being acquired, the merger is an alternative way to go public over a traditional IPO or direct listing, another substitute that has become popular in recent years.WeWork is seeking to merge with BowX Acquisition Corp, a SPAC whose sponsors include Indian-born Vivek Ranadivé, co-founder of Tibco Software and owner of the National Basketball Association’s Sacramento Kings. BowX is a cash shell that raised US$483 million in an IPO last August. As part of the merger, BowX is raising US$800 billion of private investment in public equity (PIPE) from billionaire real estate and hotel tycoon Barry Sternlicht of Starwood Capital Group and Deven Parekh, who runs private equity group Insight Partners and mutual fund giant Fidelity Management. An adviser to BowX is former US basketball giant 7ft 1in Shaquille “Shaq” O’Neal (net worth US$400 million) who will get even richer. SPACs’ celebrity sponsors, who often put up no equity apart from lending their name, regularly make up tens of millions of dollars in the aftermath of successful mergers.
Flawed business model
In 2019, this column chronicled the unravelling of WeWork and its charismatic Israeli-born founder and CEO Adam Neumann. WeWork was the biggest tech start-up in America, valued at more than US$47 billion when Japanese conglomerate SoftBank Group participated in a private funding round in early 2019. WeWork operates in more than 850 locations in 150 cities, including Singapore and Kuala Lumpur, and is the largest office tenant in New York, San Francisco, Seattle and London. In its heyday, Neumann had laid out an audacious plan for WeWork to be a dominant global force in the co-working space.
WeWork’s business model was simple: It signed long-term leases with landlords, renovated the space, filled it with fancy office furniture and then subleased the sub-divided offices, sometimes whole floors or even entire buildings, to tenants for a month or few months at a time. It was so desperate to sign up tenants that it even allowed them to cancel their lease agreements on a month’s notice.
But as it filed for its IPO in Aug. 2019, it became clear that WeWork’s business model was flawed and it was just weeks away from bankruptcy. Its S-1, the pre-IPO document that it filed with the US Securities and Exchange Commission (SEC), exposed it for what it was: A commercial real estate business focused on leasing souped-up offices for short-term after obtaining them on long-term leases rather than a tech company that it claimed to be.
Its IPO prospectus was full of promises to “elevate the world’s consciousness” rather than laying out a clear pathway to profitability. It was apparent that WeWork needed far more capital and lead time before it could turn the corner. At the time, many saw WeWork as a “house of cards” fuelled by “Silicon Valley pixie dust”. Eventually, investors made it clear that they were unwilling to put up money in the shared office operator even at a valuation of US$10 billion, or less than a quarter of what SoftBank had paid just months earlier. There were also serious concerns about corporate governance under CEO Neumann. Indeed, the scrutiny was so intense that it forced investment bankers to pull the plug on the IPO.
By November 2019, SoftBank Group — which by then had poured US$10.5 billion into WeWork — had taken a US$8.2 billion write-down on its stake, including a US$3.5 billion hit to its venture capital arm, the Vision Fund. SoftBank valued WeWork at US$7.8 billion at end-2019 while most analysts were valuing it at not much more than US$3 billion. Neumann, who drew scrutiny from investors after cashing out more than US$700 million in stock options shortly before the botched IPO, agreed to step down, 8,000 employees lost their jobs and the SEC launched an investigation into the fiasco.
SoftBank injected another US$3.5 billion into WeWork after the IPO was cancelled. It had also promised to buy a block of Neumann’s stake in WeWork and that of some of the other early shareholders for US$3 billion. A year ago, the Japanese tech-focused conglomerate declared WeWork to be in violation of some provisions of the deal. Neumann promptly sued. As BowX began talking to SoftBank about a SPAC merger in January, SoftBank approached Neumann to settle their cases out of court. SoftBank bought back US$1.5 billion worth of shares from Neumann and other early WeWork investors. Neumann will have a 9% stake in WeWork after the SPAC merger, SoftBank 57%, BowX shareholders 6.1% stake, BowX’s founders 1.1%, and investors 10.1% via a PIPE deal with other WeWork shareholders owning the rest.
Turning crisis into opportunity
How does a company barely weeks from bankruptcy turn a botched IPO into a successful listing in just 18 months? A crisis is a terrible thing to waste so WeWork got down to remake itself. It cut jobs, adjusted to a smaller footprint selling nearly 100 worst performing properties and drastically slashed the budget for glazed doughnuts as it turned off the fermented Kombucha tea taps. In 2019, WeWork recorded capital expenditure of US$2.2 billion — spending mostly on things like renovations. Last year, it cut renovation expenses by 99%. Such savings helped spruce up its balance sheet.
WeWork’s fortunes changed for the better because the pandemic forced jobs away from office towers to homes. Covid forced all of us to work from home and changed the way companies operate. Instead of keeping employees clustered together on one floor of an office building, more firms are now adopting a hybrid model as they restructure their offices and look at flexible co-working spaces leased by WeWork as telecommuting becomes a viable alternative. Instead of leasing a whole floor in an office building to accommodate, say 200 people, companies may prefer leasing a flexible office space where 80 people work while the rest continue to work remotely from home.
As corporate needs change, flexible space providers such as WeWork can accommodate more or fewer people at the head office. “The pandemic has fundamentally changed the way we work, and WeWork is incredibly well-positioned to springboard into a future propelled by digital technology and a new appreciation of the value of a flexible workspace,” WeWork’s chairman Marcelo Claure said recently.
Ironically, when the Covid lockdown began a year ago, WeWork’s prospects looked bleak. Because leases allowed tenants to cancel on a month’s notice, WeWork’s offices around the world began emptying quickly. Occupancy had plunged to 46% at end-2020 from 72% the year before. Indeed, things were so bad that WeWork failed to pay rent for properties in some of its locations. But with companies now looking to cut office costs in a post-pandemic world, WeWork’s offices are starting to fill up. It now expects occupancy to surge to 61% by end-September, 70% by year-end and 81% by the end of next year.
WeWork lost US$3.83 billion last year — almost as much as the US$3.78 billion it lost a year earlier. It chalked up revenue of US$3.2 billion or about the same it had posted in 2019. Its adjusted ebitda — a measure of the underlying profitability of a business — was – US$1.8 billion in 2020. WeWork told investors last week that this will be slashed by half to –US$900 million this year. If you are familiar with WeWork’s history you might recall that in 2019, Neumann had coined the much-derided term “community-adjusted ebitda”, a gauge that also measured “building- and communitylevel operating expenses”, including rent and tenancy expenses, utilities, internet, salaries of building staff, amenities and, presumably, even doughnuts.
The shared office operator said it expects to achieve operating profitability of around US$500 million next year. “WeWork has spent the past year transforming the business and refocusing on its core, while simultaneously managing and innovating through a historic downturn,” CEO Sandeep Mathrani wrote in a blog post on its website last week. “As a result, WeWork has emerged as the global leader in flexible space, with a value proposition that is stronger than ever.” Mathrani, who ran the commercial real estate unit of alternative asset management giant Brookfield, noted that WeWork had seen “a path to profitability and we thought it was a good time to raise additional liquidity to de-risk the balance sheet” by merging with its SPAC partner.
WeWork’s real worth
But is WeWork really worth US$9 billion? London-listed rival IWG plc, which operates Regus, has about the same amount of revenue and a market capitalisation of US$4.6 billion. Analysts say WeWork, which has a strong global brand name, may at best, command a 30% premium over Regus’ parent, but it is certainly not worth twice as much.
So, will WeWork’s second attempt at listing succeed? If shareholders of BowX do not like the deal that’s being offered to them, they have the option of just voting it down and redeem their holdings for cash. For now, though, while they are not exactly rooting for a phoenix-like resurrection of the workspace firm, they seem to be giving the merger the benefit of the doubt. The SPACs stock which plunged below its US$10 IPO price in the aftermath of the merger announcement two weeks ago, has since rebounded a whopping 30%. Investors may finally be coming around to accepting the beleaguered firm’s new, more down-to-earth vision. E
Assif Shameen is a technology and business writer based in North America