WeWork to proceed with IPO despite tepid interest

WeWork's parent, The We Company, may seek a valuation as low as US$15 billion (S$21 billion) to US$18 billion in an initial public offering, down from the US$47 billion value it commanded in the last private fund-raising round, a source said. PHOTO:
WeWork's parent, The We Company, may seek a valuation as low as US$15 billion (S$21 billion) to US$18 billion in an initial public offering, down from the US$47 billion value it commanded in the last private fund-raising round, a source said. PHOTO: BLOOMBERG

Lower-than-expected valuation would put biggest investor SoftBank in a tough spot

TOKYO • Office-sharing start-up WeWork is pressing ahead with plans to go public despite lukewarm interest in its shares, three sources said, leaving its largest investor SoftBank Group with a stark choice - take a haircut or pony up even more cash.

The We Company, WeWork's parent, may seek a valuation as low as US$15 billion (S$21 billion) to US$18 billion in an initial public offering (IPO), down from the US$47 billion value it commanded in the last private fund-raising round in January, a source said.

That means SoftBank, which has invested US$10.65 billion in WeWork since 2017 through its Saudi-backed US$100 billion Vision Fund and other vehicles, would have to write down the value of its investment, should the IPO go ahead.

Sources familiar with the situation cautioned that no final decisions have been made, and the plans around valuation and timing of the IPO are still subject to change.

The sources requested anonymity because the matter is private. Both SoftBank and The We Company declined to comment.

The sharply lower valuation reflects concerns over the sustainability of The We Company's business model, which relies on a mix of long-term liabilities and short-term revenue, and how such a model would weather an economic downturn, according to investors and analysts.

A sharp cut to WeWork's valuation would be a blow to SoftBank at a time when it is seeking funds from investors for a second Vision Fund, for which it says US$108 billion in pledges has been secured.

Returns for SoftBank's first Vision Fund have already been hit by lacklustre listings of Uber and Slack.

SoftBank chief executive Masayoshi Son and long-time lieutenant and group vice-chairman Ron Fisher were in favour of the WeWork IPO until last week, even as others in the group were pushing for a delay, one of the sources said.

However, in recent days, Mr Son and Mr Fisher have conceded internally that a delay might be in SoftBank's best interests, the source added. Mr Son and SoftBank have been pushing The We Company chief executive Adam Neumann to delay the IPO but have so far failed to persuade him, said two sources.

The sharply lower valuation reflects concerns over the sustainability of The We Company's business model, which relies on a mix of long-term liabilities and short-term revenue, and how such a model would weather an economic downturn, according to investors and analysts.

Having burned through US$2.36 billion in cash in the first half of the year, WeWork requires a fresh injection of funds and is looking to raise between US$3 billion and US$4 billion in the IPO, Reuters has reported.

Adding to the importance of The We Company going public is the US$6 billion in bank commitments it secured last month, which is dependent on it raising at least US$3 billion from the IPO.

Given its need for cash, a postponement of the IPO would be feasible if SoftBank were to inject more cash into WeWork, a proposition Mr Son has so far been reluctant to pursue, given how much Vision Fund has already put in, according to two sources.

For its part, WeWork may now wait until next Monday to begin its roadshow to pitch the IPO to investors, given that it is still waiting for approval from the United States Securities and Exchange Commission over its filing, according to one source familiar with the matter.

The company had previously hoped to be in a position to begin its IPO roadshow as early as this week, Reuters has reported.

Reflecting the uncertainty in its IPO plans, The We Company's US$669 billion junk bond issued last year fell below par on Tuesday for the first time since announcing its IPO plans about a month ago.

The 7.875 per cent note due in May 2025 was down 2.5 US cents on the dollar and the yield surged by 55 basis points to the highest since mid-August.

INTUITIVE BETS

While SoftBank and Vision Fund emphasise their long-term investing credentials, Mr Son has set out an ambitious IPO pipeline for tech investments spanning ride-hailing, fintech and health start-ups.

The tech conglomerate has burned through much of the US$100 billion raised by its first Vision Fund in just two years, recording big paper gains on internal revaluations of its tech investments as well as the sale of marquee investments including India's Amazon rival Flipkart.

SoftBank says its valuation techniques include cash-flow analysis, recent transactions and comparison with peers to underpin its numbers, but Mr Son has won a reputation for intuitive bets and for doubling down on companies that have yet to generate hard results.

SoftBank says many investments receive a vote of confidence as third parties come in as co-investors or by making follow-on investments at the same or higher valuations.

If a tech company shelves an IPO due to a lower valuation than expected, investors are generally expected to take that fall into account when appraising their stakes.

REUTERS

A version of this article appeared in the print edition of The Straits Times on September 12, 2019, with the headline 'WeWork to proceed with IPO despite tepid interest'. Print Edition | Subscribe