SoftBank rides to the rescue of WeWork

Tokyo/New York/San Francisco — WeWork announced on Wednesday it has accepted a rescue package from SoftBank Group Corp, its largest investor, that will give the Japanese conglomerate an 80% stake in the company.

The deal marks the end of an era for the troubled co-working giant, which raised money at a $47bn valuation in January, pulled out of a botched initial public offering (IPO) attempt in September and is now valued at less than $8bn in the bailout.

WeWork founder Adam Neumann will leave the company’s board as part of the package, to be replaced by SoftBank executive and newly appointed executive chairman Marcelo Claure. Neumann is set to walk away from the deal with as much as $1.2bn in WeWork stock, a $500m credit line from SoftBank and a roughly $185m consulting fee, people familiar with the matter have said. Neumann will remain connected to the company as a board observer.

The deal with SoftBank, which includes $5bn in new financing and acceleration of a $1.5bn existing commitment, grants a reprieve to WeWork parent We Company, which was on track to run out of money as soon as November. The company has been racing to slash costs since it pulled its IPO paperwork in September, and is expected to fire thousands of employees in October.

“This is exactly the reason why people are suspicious about actual valuations of unicorn companies,” said Mitsushige Akino, an executive officer with Ichiyoshi Asset Management in Tokyo. “There will be a lot of SoftBank investors that will think it’s crazy to invest this much money into one company.”

The capital infusion does not give the Japanese conglomerate a majority of voting rights and WeWork will be treated as an associate, not a subsidiary. That might allow SoftBank to wield influence at WeWork without having to show all of its liabilities on the balance sheet. SoftBank’s shares fell as much as 3.5% in Tokyo on Wednesday, their biggest intraday drop in three weeks. The stock pared its losses after the announcement.

The SoftBank rescue was one of two options the WeWork board was considering to keep the company afloat. The other alternative was a $5bn debt package presented by JPMorgan Chase, which people familiar with the proposal said would have been one been of the riskiest junk-debt offerings in recent years, including $2bn of pay-in-kind bonds yielding 15%.

As part of the deal with SoftBank, the company will offer to buy as much as $3bn from existing shareholders, from the fourth quarter. Neumann will be allowed to sell nearly $1bn of stock to SoftBank, a person familiar with the matter has said. The deal will enable him to retain his billionaire status, according to calculations by the Bloomberg billionaires index.

WeWork’s arc — from being one of the world’s most highly valued start-ups, to surrendering much of the company in an emergency bailout — is one of the most dramatic business disasters in recent memory. As recently as September, the company appeared to be headed to the public markets. But investors baulked at the company’s unusual governance structure and rapid rate of spending. According to its IPO paperwork, WeWork lost $900m in the first half of this year alone.

The chilly public market reception prompted the company to oust Neumann as CEO last month, and pull its IPO paperwork, while it tried to find a way to profitability. But making money may prove difficult. The company considers only 30% of its office space to be “mature”, which typically means generating steady revenue. It could face costs that approach $1bn to renovate new space it has already secured. Some leases and projects, including one plan for a 36-story lease in a Seattle tower, have been scuttled as the company has floundered.

The SoftBank deal paves the way for the Japanese conglomerate to take a larger role at the troubled start-up. SoftBank asked Claure, the former CEO of Sprint Corp, last month to look for ways to cut costs and raise revenue at WeWork. After Neumann’s ouster, WeWork executives Sebastian Gunningham and Artie Minson were appointed as co-CEOs, with a similar mandate to refocus on the core business.

SoftBank had already committed more than $10bn to the start-up before the rescue package, and owns about one-third of the company. Its latest effort to shore up its troubled investment comes at a delicate time. SoftBank is working to raise another, larger version of its $100bn Vision Fund, the massive tech fund that made bets in Silicon Valley so large that it changed the start-up ecosystem. SoftBank was also an investor in Uber Technologies, which is down by more than a quarter since its May IPO.

SoftBank’s losses from its recent investments could run into the billions of dollars. Founder Masayoshi Son is likely to deal with the subject when the company reports quarterly earnings on November 6

“It is not unusual for the world’s leading technology disruptors to experience growth challenges as the one WeWork just faced,” Son said in the statement. “Since the vision remains unchanged, SoftBank has decided to double down on the company by providing a significant capital infusion and operational support.”

Bloomberg