WeWork’s IPO Debacle: What Happens if It Doesn’t Go Public?

Amidst reports of an impending management shakeup at newfangled property manager WeWork, the immediate impact may be a slower growth rate as the company and its largest investor try to make an initial public offering happen by the end of this year, according to analysts. 

“The company would have to adjust to less resources and a lower rate of growth,” said Pierre Ferragu, a partner with New Street Research in New York who has studied the investments of SoftBank (SFTBY) , the largest investor in WeWork.

The We Company, the corporate parent of We Work, saw revenue more than double to $1.54 billion during the six months ended in June, according to its IPO prospectus, filed last month. Of course, its operating loss also more than doubled in that time, to $1.37 billion.

There is a strong incentive for SoftBank to bring the company to market, given that an IPO is a condition for WeWork to receive a large line of credit to keep it going.

“SoftBank obviously want to see it get to IPO, to get the $6 billion line of credit from Goldman and JP Morgan,” said Barry Oxford, who follows real-estate investment trusts, some of the closest comparable names relating to WeWork, for D. A. Davidson & Co. Oxford was referring to the “2019 Credit Facility,” as the financing is referred to in WeWork’s filing. That facility is contingent on We successfully going public.

WeWork might have to plan to operate with a lower capital budget while waiting for an IPO, said Ferragu. “Perhaps their growth would cool from doubling to something like 50% per annum.”

If WeWork doesn’t make it to an offering by the end of this year, Oxford said, “and they don’t get that line of credit, then Adam [Neumann] is back in the private equity world,” trying to raise funds some other way, he predicted. 

Multiple reports from The Wall Street Journal, CNBC and other outlets have suggested that SoftBank is pressuring co-founder Adam Neumann to give up his role as chief executive of WeWork and remain as non-executive chairman. The news reports follow WeWork’s announcement a week ago that it would delay its initial public offering, for which paperwork was filed in August. 

Probably, the pressure on Neumann is a result of the fact that he pushed for an IPO at a valuation much below what SoftBank expected, said Ferragu. SoftBank’s most recent investments were made back when WeWork was valued at a reported $47 billion, but the terms of an IPO, according to multiple reports, now have the company valued at just $20 billion or less, a substantial markdown for SoftBank. 

Major changes probably need to be made to the deal to allay investor concerns, said Oxford. “If you look at the S1, and the violent reaction to what’s in it, this is not about changing a few paragraphs, this thing needs to be heavily revamped,” he said. Oxford expects those changes to include “a much-revamped profile, with an independent board [of directors] and independent compensation committee, and a new CEO.” 

SoftBank, which has already put $10.7 billion into We Work, could extend fresh capital to WeWork, but not another $10 billion, Ferragu said. Having less capital while waiting for an IPO means the company would have to slow some of its property acquisition and funding, reckoned Ferragu. 

Still, that wouldn’t be fatal for the company, he argued. Even at 50% per annum, “we are still talking very aggressive growth,” said Ferragu.

“The long-term ambition is to become the prime provider of liquidity in the property market,” said Ferragu, referring to the ability for We Work to provide office space for tenants much more flexibly and quickly than traditional property managers, who may take many months to make new office space available. “Even if growth has to slow for a time, that’s still a very valuable position to be in.”

REIT analyst Oxford similarly offered that WeWork does have a viable business. “They are on to something for sure,” he said, “This is a viable business and the properties are profitable once they get up and running.” 

Although the IPO is “not a slam dunk,” Oxford said, “bring in a credible CEO, and I think it’s got a shot.”

But, if the company is not able to go public and Neumann has to seek additional private funding, “they become a completely different company with a completely different growth profile,” Oxford predicted.

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