Wall Street investment bankers including JPMorgan Chase & Co. are scrambling to determine if WeWork, the troubled office-sharing outfit, can be salvaged after its plans to become a public company cratered, raising questions about its long-term viability, FOX Business has learned.
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People with direct knowledge of the matter say JP Morgan and a number of top real estate companies are now scouring WeWork’s balance sheet, looking to slash costs, including reducing the outfit’s workforce, and scaling back its growth in leasing properties as they attempt to determine if WeWork’s business model can survive over the next year. WeWork has already grounded the now infamous company jet and put it up for sale, according to reports. Wall Street analysts say without an infusion of cash, WeWork could run out of money in the coming months, a victim of rapid growth and poor expense management and corporate governance.
“WeWork has to get capital—they’ll go bankrupt if they don’t get more financing… the company has been in conversations with a consortium of banks but all roads lead to SoftBank,” Harvard Business School Senior Lecturer Nori Gerardo Lietz tells FOX Business.
As FOX Business reported Thursday, one of WeWork’s biggest investors, tech conglomerate SoftBank may add more capital into the firm; Softbank already has an almost $11 billion investment in the company that was once valued at $47 billion, but now the office sharing outfit could be valued at $10 billion or less, Wall Street traders and investors say.
A Softbank spokeswoman had no comment but wouldn’t deny the possible capital infusion. A JP Morgan spokesman declined to comment and WeWork didn’t return an email at the time of publication.
Speculation that WeWork is in talks with bankers to fix its balance sheet and raise capital has recently stabilized its debt prices, which have fallen to depressed levels in the tumultuous run-up to its failed IPO on September 30. WeWork’s long-term debt traded around 85 cents on the dollar in recent days, though it dropped to 84 cents on the dollars Thursday amid the financing uncertainty. Despite the recent stabilization, bonds still trade at levels that suggest the company is heading toward insolvency.
Softbank, an early supporter of former CEO Adam Neumann who was forced to resign amid the implosion of the IPO and who is now the outfit’s non-executive chairman, is said to have the most incentive to keep WeWork afloat. Besides being the company’s biggest single investor, the technology investment house has stakes in numerous private companies that could face rough market conditions when they attempt to go public if WeWork is forced into bankruptcy as some investors suspect.
“SoftBank is stuck between a rock and a hard place," Lietz adds. "If they don’t support the company, it may go bankrupt. WeWork has to complete its work-in-progress to get any value out of the build-outs they’ve started but not yet finished. That cost is considerable."
As SoftBank is looking to resolve the WeWork crisis, CEO Masayoshi Son is also looking to raise billions for a second vision fund. While Son is said to be in talks with companies including Microsoft, it is unclear whether he has secured any investments. It’s also unclear whether Saudi Arabia’s Public Investment Fund, which spent $45 billion on Son’s first Vision Fund, will inject any more capital into another vision fund.
People at JP Morgan and other banks involved with WeWork, like Goldman Sachs, believe WeWork’s core business—providing shared workspace to tech startups and entrepreneurs—has a future, according to people with knowledge of the matter. The company was started in 2010 and experienced massive growth; the company recorded 527,000 so-called members who use its leased office space this year, compared with 258,000 in 2018.
|JPM||JP MORGAN CHASE & CO.||98.04||+0.87||+0.90%|
|GS||GOLDMAN SACHS GROUP INC.||189.04||-0.90||-0.47%|
“The WeWork failure is about the governance model, not about a business model.” Greg Kraut of K Property Group tells FOX Business. “The core business model works… they’ll get through this.”
But bankers say management under Neumann failed to rein in costs and keep the company from burning through cash; Neumann himself financed hundreds of millions of dollars of his holdings before the company’s IPO attempt and was accused of various forms of self-dealing.
As they pour through the company’s books, bankers worry that they will find more negative surprises that could push down the value of the company even more and make it difficult to raise capital.
WeWork was forced to pull its IPO—despite bankers at Goldman pitching valuations as high as $90 billion—after investors began studying its high debt levels, massive losses and that it burned through mountains of cash, issues that were glossed over by the company’s marketing pitches and Neumann’s savvy promotion. Softbank’s investment in the company that began in 2017 also provided a boost of confidence that papered over these issues, until the firm began pushing an IPO this summer, bankers say.
“If we find more bad stuff, the pressure on this business will be substantial,” said one investment-banking executive involved in WeWork’s efforts to repair itself. “But if we don’t, the company may come to market next year.”
The investment banking official said if the WeWork does survive, it will be smaller, with a leaner workforce, and a valuation closer to around $10 billion.
Yet even that scenario may be wishful thinking, others say. “It may not be physically possible to cut costs as quickly as WeWork needs to,” NYU Stern Professor Scott Galloway tells FOX Business. WeWork bankers will have to clean its balance sheet, and prove to the market that new management has a tighter grip on finances even to survive as a private company, much less attempt to come public at some later date. That task will fall to Artie Minson and Sabastian Gunningham, the new CEOs, who will run the company as Neumann recedes into the background.
“Even if Chernobyl had every resource imaginable, it couldn’t have gotten cleaned up in three months,” Galloway adds.