WeWork went on a spending spree in the days ahead of its now failed IPO.
The recently insolvent company which until a few months ago had a valuation of $47 billion before it had to be bailed out by SoftBank saw its losses more than double in the third quarter, soaring to $1.25 billion, not much below its loss for the entire 2018. The results, which were reported in a presentation for WeWork creditors - the company has to file financials to the group of creditors who hold its "public" debt - seen by Bloomberg and the Financial Times, revealed why the cash incinerating office sublettor careened towards a cash crunch when its IPO plans and a linked debt financing collapsed in September.
In a furious money-burning attempt to impress investors with its market share, WeWork opened almost 100 offices in the third quarter, bringing its total to 625, and helping lift WeWork’s net revenues in the period by 94% from 4482 million a year earlier to $934 million. That was the good news: the bad news is that WeWork affirmed that it continues to lose more than two dollars for every dollar the group generated in sales in the period.
In its unprecedented spending spree to spend all of its IPO proceeds before it even went public, the company also said it added 115,000 desks in the third quarter, taking its total to 719,000. However, the reason why such hollow growth would end up resulting in an even greater loss is that WeWork reported 609,000 memberships at the end of Q3, meaning its overall occupancy rates slid as it raced to open new locations to 79 per cent at the end of the third quarter from 82 per cent at the end of June.
WeWork's bizarre growth at any price would turn out to be its former messiah CEO's last decision: Adam Neumann stepped down as chief executive in September as the IPO fell apart as investors balked at the thought of making the megalomaniac the world's first immaculately coiffed, immortal trillionaire.
After the IPO fell apart, WeWork's biggest shareholder, SoftBank, pumped another $1.5 billion into the company in October to prevent the company from running out of cash in November, and stabilize its finances while taking majority control of the company, installing the former boss of its US telecom unit Sprint, Marcelo Claure, as executive chairman. The Japanese telecom-turned-venture capitalist group also arranged a new $5bn loan for WeWork and has agreed to buy $3bn of the company’s shares from investors and employees including Mr Neumann in the coming weeks. Because who more deserves a $1+ billion golden parachute than Neumann.
Since his arrival, Claure embarked on a cost-cutting drive and is in the process of firing 4,000 of the company’s roughly 14,000 employees, with large cuts in the US expected to begin next week, according to multiple people briefed on the plans. It remains unclear how the company plans on growing its revenue if it no longer has access to unlimited funds; for the answer check in next quarter when we expect both WeWork's revenue and net income to take another sharp leg lower.
WeWork is also selling several of the companies it acquired in recent years and has drastically slowed its pace of new lease signings.
The company is seeking a new CEO, and T-Mobile’s John Legere is among the candidates.
But for now, none of this post-failed IPO activity is reassuring bond investors at all...