SoftBank and WeWork discuss shelving coworking firm's IPO

The company's valuation has plummeted as investors have raised governance concerns

FILE PHOTO: People stand outside a WeWork co-working space in New York City, New York U.S., January 8, 2019. REUTERS/Brendan McDermid/File Photo
Powered by automated translation

Executives of WeWork and its largest investor, SoftBank, are discussing whether to shelve plans for an initial public offering of the money-losing co-working company, said people with knowledge of the talks.

SoftBank is pressing WeWork to postpone the stock offering after investors expressed serious concerns about the business and its corporate governance, said the people, who asked not to be identified because the discussions are private.

WeWork, which owns or leases office space and then rents it to companies typically needing short-term space, had planned to hold a roadshow to promote the offering as soon as this week, an executive told analysts last week. Representatives for SoftBank and We Co, the parent of WeWork, declined to comment.

In the space of a few months, WeWork has gone from one of America’s most valuable unicorn startups to a punchline in investment circles. Early this year, Goldman Sachs Group pitched WeWork as a $65 billion business.

But when the company filed a preliminary prospectus last month it revealed the company had racked up billions in losses, was burning cash and had an arcane corporate structure riddled with potential conflicts. In just the first six months of 2019, WeWork lost $690 million, bringing its total losses to almost $3bn in the past three years, the filing showed. Now WeWork advisers are estimating the company is worth less than a third of Goldman’s figure.

SoftBank Group and its affiliates hold about 29 per cent of WeWork stock, Bloomberg reported last week, which is even more than co-founder and chief executive Adam Neumann, though he maintains effective voting control through a three-class share structure.

SoftBank has invested a total of about $10.65bn into the New York-based company, but that has been at a range of valuations. SoftBank’s Vision Fund invested just once at about a $20bn valuation in early 2017, while SoftBank Group kept pouring money into WeWork, most recently in January at a $47bn valuation.

An IPO at a $15bn valuation would result in a $4bn writedown for the Japanese conglomerate and a $5bn loss from the latest reported fair value for the Vision Fund, while a debut at $25bn isn’t likely to result in losses, Chris Lane, an analyst at Sanford C. Bernstein & Co wrote in a report. Lane estimates that WeWork is worth about $24bn, with SoftBank holding a roughly 31 per cent stake.

“If correct this would not imply significant losses on the investment made to date, but would still be a blow to an investment team which is targeting a 40 per cent annual IRR,” Lane wrote. “With investor concern regarding the mid-to-near term outlook for the global economy the timing for this IPO isn’t ideal.”

WeWork needs $7.2bn over the next four years to see the company through its cashflow negative period, but the total cash needs swell to $9.8bn if there is a recession in 2022, Lane wrote. Despite the investor concerns, Bernstein remains upbeat on WeWork’s long-term growth prospects and sees it as “fundamentally an attractive business.”

SoftBank's shares rose as much as 4.3 per cent in Tokyo on Tuesday, while the Nikkei 225 stock average was little changed. The Financial Times reported on SoftBank's position earlier Monday.

Neumann has been the subject of scrutiny from investors over disclosures in WeWork’s IPO paperwork. The company paid Neumann rent and spent $5.9m to acquire a trademark he owned, as it lent him money.

In recent months, WeWork has sought to address some of its governance issues.