SoftBank has plan to make WeWork profitable
CEO of conglomerate says turning around the office-sharing firm will be simple.
WeWork can be fixed — and there’s a plan, according to SoftBank Group Corp., which offered the cashstrapped, unprofitable office-sharing company a lifeline in exchange for majority ownership.
“Time will take care of things,” SoftBank founder and Chief Executive Masayoshi Son said Wednesday during an earnings briefing in Tokyo, during which he tried to put a silver lining on the mess his company is now on the hook for. WeWork’s new offices, with their low occupancy rates, are like apples that aren’t ready to be eaten, he said. “We’ll make money once they’re allowed to ripen.”
In a mix of bravado and practicality that’s classic Son, the billionaire opened his speech by describing the earnings announcement as “not good at all.” He then said that turning around WeWork would be “simple” and that his team had a plan to right the struggling firm, whose effort to launch an initial public offering this year unleashed a cascade of revelations that culminated in the cancellation of the IPO
ouster of WeWork’s leader.
Son said WeWork’s product — good-looking office space that companies and entrepreneurs can rent short term — was sound, noting SoftBank’s satisfaction with some of its WeWork offices in Japan.
Still, Son admitted that he overestimated the company’s value and later discovered it had all kinds of corporate governance problems, including co-founder Adam Neumann’s outsized power and control rights. Son said he was blinded by Neumann’s positive attributes, including his design of WeWork’s offices.
Son was also intent on making clear that SoftBank has a “no bailout” policy and there won’t be any other rescues among the companies it invests in. “WeWork is the last one,” he said, with free cash-flow potential being the main criterion for evaluating future Vision Fund investments.
To transform the moneylosing startup into a profitable company, Son said he’s ordered a halt to new building developments, which tend to lose money for the first year or so before ocsion cupancy picks up. Next, he said, he’s slashing expenses and getting rid of all unprofitable WeWork businesses, failing to elaborate on what those were. He added that WeWork could generate $1 billion in annual profit in a few years and that the business in Japan is already making money.
WeWork does seem to be executing on some of Son’s plans. It’s considering giving up office floors in at least half a dozen locations in Hong Kong, people familiar with the matter said Wednesday. Hong Kong has one of the world’s most expensive office markets.
The firm’s new management is also reassessing whether to proceed with about 28 potential office deals in London, its secondlargest market.
The deals under review are at varying stages, from a preliminary inspection of promising properties to detailed talks.
After WeWork pulled its IPO in September, the troubled company received a $9.5-billion rescue package from SoftBank in exchange for a raft of changes, including the ouster of Neumann. But Son took issue with the characterization of the infuand as a bailout, choosing to describe it as a way to buy in at a cheaper valuation and lower the average cost of its stake in the company.
Son said that he had talked with lawyers to see if he could back out of a $1.5billion warrant pledged to WeWork, but they said he couldn’t. So Son decided to buy even more shares at a discounted price, in effect lowering the average cost of his equity in the business.
SoftBank earlier paid about $89.40 a share to acquire 12.8% of WeWork. With the latest investment it has 41.2% at $19.38 a share. SoftBank will take a $4.7-billion hit from WeWork on its nonoperating profit, according to Son’s presentation.
As a result of write-downs associated with WeWork, Uber Technologies Inc. and other marquee investments, Softbank on Wednesday reported its first quarterly operating loss in 14 years.
Analysts caution that Son has overpromised and underdelivered before. “It will likely be a lengthy process to fix WeWork,” said Bloomberg Intelligence analyst Anthea Lai.