WeWork to go public via BowX SPAC

Equities

WeWork is to go public via a SPAC merger with BowX Acquisition Corp in a deal valuing the company at around $9bn. Shares in BowX (NASDAQ: rose 5% in pre-market trade to above the nominal $10 it listed at. The move will allow WeWork to trade a publicly-listed stock without the kind of scrutiny that kyboshed its abortive 2019 listing. The $9bn is substantially below the roughly $47bn discussed when it filed for its 2019 IPO.

The deal is funded by $483m in cash raised by BowX plus $800m in private investment from investors including Fidelity, BlackRock and Starwood Capital. The deal provides WeWork with about $1.3bn in capital “which will enable the company to fund its growth plans into the future”, it said. Upon completion, the company will have approximately $1.9 billion of cash on the balance sheet and total liquidity of $2.4 billion, including a $550 million senior secured notes facility to be provided by SoftBank Group.

As noted on Tuesday, WeWork announced losses of $3.2bn last year as it pitched for a SPAC listing and $1bn investment. This was a narrowing from $3.5bn burnt in 2019 because it slashed capex to the bone, cutting investment from $2.2bn to $49m. Occupancy fell to 47% from 72%, but the company expects to rebound to 90% next year, which seems optimistic. As does an expected doubling of revenues to $7bn by 2024. We looked at the leasing structure back in 2019 in some depth and it hard to see how WeWork will gain more customers as the effects of the pandemic seem set to linger. In particular, having had experience of the WeWork goldfish bowl cubicles, they are exactly the opposite of what workers will desire as they return to offices – more open plan please.

As noted on Tuesday: Investors who might have got swept up in a WeWork IPO in 2019 will be grateful the listing got pulled. Now they get another chance to get burnt by WeWork’s ambitions. SPACs mean it’s even easier to go public and I’m sure they will find some willing backers for this serviced office provider tech platform. The pandemic has radically transformed the services office landscape from 2019 but WeWork has also been forced to change for other reasons too and is more streamlined than the bloated entity it once was, but it remains overly optimistic both about its prospects and those of the market in which it operates. It’s just all too easy with a SPAC and only underlines the concerns about this craze and the misallocation of capital it is fostering.

Elsewhere, GME stock trades +6% in pre-market after yesterday’s 52% jump. Dow and S&P 500 futs suggest Wall Street will add to Thursday’s gains. European stocks are holding onto early gains and trade broadly positively. Eyes on US bank stocks after the Federal Reserve said Thursday they can accelerate dividend and buybacks after June 30th as long as they pass the latest round of stress tests. US 10s trade up at 1.675% post the 7-year auction yesterday.

In FX EURGBP is the one to watch as the pair takes a fresh look at the key 0.8540 support, with little in the way below this to block a move to an 82 handle.

WeWork sets the bar lower as existing investors push to postpone IPO

IPO

Co-working firm WeWork is on the brink of IPO, but it seems like We might have some problems.

It seems that being a fast-growing tech company isn’t enough anymore; investors need a well-defined path to profitability as well.

Which has been a real kicker for the likes of Uber, Lyft, and IPO-hopeful WeWork, none of which is anywhere near actually making a cent.

WeWork was last valued at $47 billion during a private round of funding. But now it’s rumoured that WeWork will be seeking a $20 billion valuation or lower at IPO – and that’s if it even goes ahead at all.

Do existing investors want to halt the IPO?

Last week it was reported that CEO Adam Neumann had flown to Tokyo to meet with SoftBank Group – one of the company’s biggest investors. Amongst the ideas floated was the possibility SoftBank could provide another capital injection so that the IPO could be postponed until 2020.

Whether SoftBank will or not remains to be seen. The company might be feeling stung at having committed to investing $4 billion at a valuation of $47 billion when there is no chance WeWork will hit that kind of market capitalisation when it goes public.

SoftBank has to be careful. The company’s largest investment was in Uber – pouring billions into yet another dire tech company float would not reflect well on a company look to raise money to launch a second tech-focussed Vision Fund.

It isn’t just in conversation with SoftBank that the idea of shelving the IPO has been raised. Some existing investors, perturbed by the reception the IPO prospectus has garnered are suggesting putting things on hold.

WeHaveConcerns

Executives at WeWork showed they are not entirely unaware of the market reaction to unprofitable tech companies. Both Uber and Lyft are well below their initial offer price. But they were wrong if they thought even more-than-halving the valuation would be enough to placate concerns –especially when similar-sized competitor IWG is profitable and yet only valued at $4.6 billion.

There are other issues bothering investors anyway, who have concerns over the way the business is run, it’s structure, and the huge concentration of power.

WeWork’s share structure includes three classes; CEO Adam Neumann owns 2.4 million class A shares (<1.5%), 113 million class B shares (98%) and 1.1 million class C shares – that’s all of them. Class A shares give one vote, class B and C each grant 20. Neumann’s total holdings equates to 2.27 billion votes.

The co-founder occupies a large amount of space in the Risks section of the company’s S-1 filing due to potential conflicts of interest. Neumann has, or had, significant operational interest in several of the locations WeWork leases. He also charged the company almost $6 million to use the We trademark (WeWork is owned by The We Company – the structure is very complicated and has created further unease amongst investors).

WeWork scrambles to avoid becoming the next IPO flop

At the start of the year, Uber and Lyft seemed like exciting prospects. Markets looked likely to get swept along by the spiel of these cash-burning, lossmaking companies. But it seems Uber and Lyft failed to provide a convincing response to the profitability question.

It shouldn’t be a surprise, then, that when WeWork released its prospectus, complete with an admission it may remain unprofitable ‘for the foreseeable future’, investor response has been cold.

WeWork seems to have realised that its current offering isn’t enough to get the market onboard. But with expectations that its roadshow could begin this week, does the company have enough time to fix such deeply-entrenched issues as corporate structure and distribution of power, let alone its financial outlook, in time to avoid becoming 2019’s next big IPO flop?

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