When the WeWork IPO spectacularly imploded, it not only short-circuited SoftBank's self-referential perpetual valuation engine and crippled the public's demand for public offerings as observed by today's Peloton fiasco, it also put WeWork entire future in jeopardy. The reason: a successful IPO would mean not only billions in much needed new capital but also continued access to billions in credit lines. Instead, as things stand now - with an IPO that has been put on indefinite hiatus as the company scrambles to decide what to do following the abrupt termination of its messianic CEO, Adam Neumann - WeWork only has enough cash to last to maybe next spring as it is losing millions of dollars a day; what's worse, as Bloomberg warns, "It may be shut out of the public stock and bond markets to raise new money."
In short: WeWork may have just months left before it has to file for bankruptcy.
That, as Bloomberg's Claire Boston writes, is the grim situation confronting the office-sharing company days after a corporate upheaval that left its once-glittering plans shattered. Adam Neumann, who founded the company nine years ago with a promise to "elevate the world's consciousness", was ousted as CEO.
The most immediate problem, however, is that once the IPO was called off, until at least next year, it unraveled a $6 billion financing package. It is also the gargantuan challenge facing the company's two new co-CEOs brought in to replace Neumann - Sebastian Gunningham and Artie Minson - who have to find a way forward for a company that was until just a few weeks ago one of the world’s most valuable private startups with a valuation of $47 billion... but has not only never made a penny in profit but saw its losses grow the more its revenue increased.
And with equity markets slammed shut for the company that top-ticked the IPO market, means seeking substantial new bank loans and private investments.
It also may mean shedding thousands of jobs and tossing out Neumann’s grow-at-all-costs ambitions.
But even getting a new bank loan will now be an uphill battle. WeWork is in talks with Goldman Sachs and JPMorgan about a new $3 billion loan, but as we reported a few weeks ago, there’s a catch: any such deal would also require the company successfully IPO. And that is for now at least, a dead end. This, as Bloomberg notes, could mean Gunningham and Minson returning hat in hand to its biggest investor - SoftBank, the Japanese company that has already pumped in more than $10 billion.
Will SoftBank comply? It very well may have no choice, unless it wants to see its entire house of VC cards collapse in a heap of smoldering valuation haircuts, which in turn drags down SoftBank itself (which as we reported yesterday has problems of its own, as Goldman is seeking to dump its loan exposure to SoftBank's Vision Fund).
Just last night the FT reported that SoftBank is already in talks with WeWork to increase a $1.5bn investment the Japanese telecoms-to-technology group has agreed to put into the office leasing company next year. The question here is when will SoftBank's own investors and employees put an end to this lunacy, in which Masayoshi Son keeps throwing good money after bed, a pet project which is putting the existence of one of Japan's biggest firms in jeopardy, out of nothing more than hubris.
Of course, getting new capital is critical: as shown in the chart above, the company lost $690 million in the first six months and is expected to generate a loss from operations approaching $3 billion as it burns through tens of millions in cash daily. Which means that according to analyst estimates, with its existing $2.5 billion in cash as of June 30, the company could run out of money by mid-2020.
Such numbers could spell the end to Neumann’s profit-less growth ethos. When Fitch Ratings downgraded the company’s debt in August, it said the company had made a choice to prioritize growth over profitability by planning for more than 1.25 million new desks -- more than twice what’s currently available -- and plans to open in 175 new cities globally.
Worse; for next year alone WeWork had planned to add 725,000 new desks at a cost of about $4.5 billion, S&P Global Ratings has estimated.
However, without the news cash it will simply will be unable to do that; instead it will be forced to start dumping CRE exposure as it begins the inevitable pre-bankruptcy shrinking process.
As a result, as Bloomberg warns, WeWork’s very business model is now at stake.
WeWork has raised more than $12 billion to rent office space that it renovates and then leases to companies. But that strategy has left it in a precarious position. It has some $47 billion of future rent payments due. On average it leases its buildings for 15 years. Yet its tenants are committed to paying only $4 billion, and on average have leases for 15 months.
Those long-term leases “may become an albatross in an economic downturn,” Bloomberg Intelligence analyst Jeffrey Langbaum wrote in a report Wednesday, adding that WeWork needs to find a “clear path to profitability.”
Others were more laconic:
When does the WeWork real estate liquidation sale begin— zerohedge (@zerohedge) September 25, 2019
And so, the new CEOs have no choice but to slash costs and expenses drastically as the company finds itself unable to rely on outside sources of capital. In addition to Neumann himself, how is now gone from the company's C-suite, they new CEOs are weighing job cuts that could number in the thousands - to be sure, with over 12,000 employees, WeTerminate has a lot of fat to trim - as well as "eliminating or spinning out non-core businesses, such as WeGrow, an experimental New York City private school" a Bloomberg source said.
Deep cuts could free up meaningful resources: the company spent $184 million on payroll last year, and another $23 million in stock compensation.
One upcoming disposition: Neumann's famous private jet.
According to Business Insider, WeWork is set to sell the luxury Gulfstream that its cofounder Adam Neumann used to travel the world... "a symbol of the company's corporate-governance issues that have in part derailed its initial public offering." The company bought the Gulfstream G650 for $60 million last year. Some investors said the private plane was a corporate-governance red flag in the lead-up to the company's IPO, according to a source familiar with the matter.
The Gulfstream G650 is considered one of the most luxurious and popular private jets available. The plane has a range of more than 8,000 miles — at top speed, it can fly from London to New York or Beijing, while at a slower, more fuel-efficient rate, it can get to Buenos Aires or Los Angeles, Business Insider previously reported.
It's a popular jet among the rich and famous, as well as the executives of global corporations. Tesla CEO Elon Musk and former Starbucks CEO Howard Schultz are among the jet's owners, as was the Apple CEO Steve Jobs. More than 350 G650 planes have been built.
Staff members told BI that they spent "three days straight" downloading thousands of movies and TV shows onto the plane’s media system. Neumann also often hosted meetings with employees as he travelled.
The problem here is that there is currently a glut of used G-650 hitting the market, and with an indicative asking price of around $40-47 million, WeWork is about to lose about to lose 20-30% on this "investment."
Sale of the Gulfstream aside, whether or not it is successful in slashing its overhead will determine if WeWork has any future at all. The company has maintained that it could become a profitable company if it decided to cut its growth ambitions, and now it has no choice but to do just that; the question is will anyone be around to see it: The new co-CEOs have warned employees in an email that they “anticipate difficult decisions ahead” to protect WeWork’s “long-term interests and health.”
But how many of the company's formerly generously rewarded employees will be willing to stick around pro bono? (don't answer, that's rhetorical).
To be sure, Bloomberg notes that with the equity market window shut, WeWork could try tapping the junk bond market again. But credit investors would demand a steep price. WeWork’s existing high-yield bonds yield about 9.8%, far above the average for junk bonds, which sit around 5.7%. On Wednesday, they were trading at the lowest prices since June.
And while it is not very likely, the next question is if WeWork does in fact succeed in slashing its cash burn, does it still face an imminent default. Here at least there is some good news: there is no hard default trigger until 2025 when its existing bonds mature. Meanwhile, with revenue of more than $3 billion in the first six months of this year (a number which will plunge as the company proceeds to slash costs), WeWork in theory shouldn’t have difficulty making interest payments on its bonds, which amount to $52 million in annual payments on the notes.
Still, as WeWork runs out the clock, will that be sufficient for any new investors to step up after the recent fiasco? Even as the new managers seek to clear up the company’s balance sheet to prepare for an IPO at some point, “The market is highly skeptical of this company,” said John McClain, a high-yield bond investor at Diamond Hill Capital Management.
Finally, should WeWork fail, it won't end there, as the market will then focus on the company that made this farce possible in the first place.
“All eyes will be on SoftBank and how WeWork will proceed as they move away from Neumann.”