WeWork Faces Some Hard Choices in Trying to Survive
In the space of only a few months, commercial real estate company WeWork has gone from a promising looking IPO to on their deathbed. They have some tough decisions.
The concept behind WeWork, allowing for more efficient use of commercial space by allowing them to be shared among users, sure sounded like a good idea at the time. 9 years later this idea finds itself on its deathbed and will require some serious intervention to survive much longer.
WeWork started its life in New York City in 2010 where the founders caught the attention of a New York real estate developer who put up $15 million for a 33% stake in the company, allowing them to open their first location. They continued to raise more and more money, eventually seeing over $12 billion put up by investors over the years, and were planning on releasing an IPO this year to raise even more.
They appeared to be doing well enough on the surface, for this stage in their life at least, and their locations kept expanding and they even got half a billion dollars from SoftBank to launch WeWork China. They made several acquisitions along the way and they even spent $60 million on a private jet.
The fact that a company may be losing money after years of effort to make a profit doesn’t necessarily scare people very much, so the fact that WeWork has been losing money wasn’t seen as much of a roadblock.
For some reason, people still are willing to invest in companies such as Uber and Lyft even though both are simply bleeding money year after year. The amount of their losses was at least known at the time of their IPOs though, and going public does expose all your books to regulators and the public, so if you are hiding something, the job of the SEC is to uncover it.
When they had to open their books for the SEC filing of their IPO, it turned out that things at WeWork were a lot worse than people thought. If the $2 billion loss last year doesn’t scare you, their $47 billion dollars in lease obligations versus only $4 billion of lease commitments definitely should.
While their footprint has been growing, it has remained red colored, and expanding red isn’t the goal in business. The biggest question that people ask when they are considering investing in a company that is losing rather than making money is now and when this will end. Some companies may rely on dreams, like Uber and Lyft, but with WeWork, there isn’t even a dream involved, or at least one that goes beyond wishing and turns those wishes into something at least somewhat plausible.
WeWork Faces an Existential Crisis
It’s not that WeWork is now in a completely hopeless situation, but things do look quite grim now and borrowing at 15% to make bond payments with no end in sight isn’t exactly a palatable option.
Some companies do keep things together for quite a while borrowing to pay off their debt essentially, but not with credit as bad as WeWork’s is. They also have some sort of plan on how they may get out of trouble, rather than just doing the same thing over and over again and hope it eventually works, qualifying for Einstein’s definition of insanity.
Back in January, WeWork was valued at $47 billion, a number that they were planning on using with their IPO later in the year. When we finally got to this stage, it turned out that they were only valued at $10-$12 billion, which is what ended up imploding the IPO bid, which is now officially postponed.
CEO and co-founder Adam Neumann, prior to the IPO and during the time when the company’s value was very puffed up, cashed in $700 million of company stock, and after the cat was out of the bag, he flew the coop. When the leader of the company heads for the lifeboats and sails away with this much loot, this does not look good at all.
This takes us to their present crisis, as money that they borrowed to get here needs to be repaid. Investors have become very nervous and the yield on the $670 million of their bonds has risen to 13%, now trading at 78 cents on the dollar. This in itself doesn’t affect WeWork’s interest in these bonds, as the interest payments they make are determined at issue, but it is a glaring no confidence vote for the company.
Where this problem shows itself is in their ability to borrow more, which they need to do in order for their ship to keep from sinking to the bottom of the sea. The expectation now is that they will have to pay around 15% to get people to buy new paper, a number that is scary enough if you are profitable but much more so if you will likely just lose the money and then owe both the principal and all this interest.
This is all similar to someone who spends more than they make for a long time, maxes out their lines of credit, and are now down to the credit cards. Each month, they need to borrow more, and their interest payments just keep getting larger, until they simply reach their capacity to borrow more.
WeWork is in this place right now, and their credit cards are maxed out and they are begging for their limits to be increased, at a time where it doesn’t make a whole lot of sense to extend them.
WeWork Must Choose or Die
Continuing to just borrow and do so at much higher rates doesn’t really make sense, but JP Morgan is heading up a plan to provide $5 billion in relief, which includes $2 billion of 15% bonds, which in itself works out to $300 million in interest payments per year. This option just looks like it will lead to a bigger crescendo of failure.
The other option is to give up control of the company to SoftBank, in a bid that is much more reminiscent of J.P. Morgan himself than the one the bank named after him offered. While companies normally are very reluctant to give up control, in this case, they should be happy that someone else will take the helm.
If WeWork is ever to actually work, it is painfully obvious that someone with deeper pockets needs to be involved. SoftBank’s pockets are very deep, although whether they are deep enough to survive this is for the company to decide. They are seeing something here worth pursuing, beyond looking to protect their current stake, which is now at $2.5 billion, and they aren’t afraid to invest in losing companies to be sure.
Without either, WeWork will simply run out of money and default on their bonds soon, and as soon as next month. No one is exactly sure how long they have left, but it isn’t long at all, and there is indeed a sense of urgency right now in the company.
It is hard to imagine not choosing JP Morgan’s bailout over just going belly up, although this may just postpone the inevitable. The main reason why SoftBank’s offer is very likely a better one is that the more you get them to invest in your company, the more invested they are and the less likely they will want to see you go down.
The biggest worry is how WeWork would fare if we get a real economic slowdown, as this would hit WeWork particularly hard due to how much their demand for commercial space would drop. This could and likely would take WeWork’s chances of success all the way to zero.
Analysts from Smartkarma summed things up well when they wrote that “we cannot fathom the contortions that would be necessary to articulate a path to profitability here.” There will be plenty of contortions but perhaps in the way that a fish on the ground contorts, and they also may meet the same end.
Editor, MarketReview.com
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