WeWork could turn out to be Vision Fund’s biggest lemon

WeWork has lost its CEO, its initial public offering (IPO) is delayed indefinitely, prospectus details finally reveal huge losses, it is burning cash like kerosene, and it needs to raise funds imminently.

So, of course backer SoftBank. would throw in more money.

Already a 29% shareholder of The We Co — WeWork’s official name — SoftBank is discussing whether to increase a $1.5bn funding pledge by another $1bn, the Financial Times reported on Thursday.

What sounds like folly is probably the savviest thing Masayoshi Son and his team could do right now.

Naturally there’s a caveat to that extra $1bn: SoftBank would get to change the terms of a warrant agreement and reduce the price at which it acquires WeWork stock, the Financial Times reported. This means that whenever SoftBank sells off its stake, the possible upside from its investment increases — or at the very least, the downside from a worsening valuation narrows.

Earnings at the $100bn SoftBank Vision Fund, and by extension SoftBank Group, rise and fall on the value of its holdings in private and public companies. With post-IPO declines at Uber Technologies and Slack Technologies, the Vision Fund risks posting a large loss this quarter. A successful WeWork IPO would have filled that hole and then some. But that’s not going to happen, making a delayed IPO a better choice for SoftBank than a low-value one.

New leadership at WeWork may not be able to turn around the business given $50bn of lease commitments. This means that chances of an eventual WeWork IPO fetching the most recent $47bn valuation are slim.

But it’s too late for SoftBank to back out. The company is in deep, and any reduction in the IPO price is going to hurt. Since cutting its losses and walking away isn’t an option — as WeWork’s biggest outside investor, SoftBank has just as much to lose — the best thing Son can do is double down and use that huge chequebook he has to cut a better deal.

Upping the ante, at a lower valuation, will force the Vision Fund to write down its current holdings in WeWork. A weakened IPO, or even talk of a weakened IPO, would force that to happen anyway. At least this way SoftBank can leverage WeWork’s desperation to lower the average price at which its own stake was acquired.

Out of all the investments the Vision Fund has made so far, WeWork could turn out to be the biggest lemon. At least SoftBank is reaching for the tequila and salt.

• Culpan is a Bloomberg Opinion columnist covering technology. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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