Executives of WeWork and its largest investor, SoftBank, are discussing whether to shelve plans for an initial public offering of the money-losing co-working company, said people with knowledge of the talks.
SoftBank is pressing WeWork to postpone the stock offering after investors expressed serious concerns about the business and its corporate governance, said the people, who asked not to be identified because the discussions are private. WeWork, which owns or leases office space and then rents it to companies typically needing short-term space, had planned to hold a roadshow to promote the offering as soon as this week, an executive told analysts last week. Representatives for SoftBank and We Co., the parent of WeWork, declined to comment.
In the span of a few months, WeWork has gone from one of America’s most valuable unicorn startups to a punchline in investment circles. Early this year, Goldman Sachs Group Inc. pitched WeWork as a $65 billion business.
But when the company filed a preliminary prospectus last month it revealed the company had racked up billions in losses, was burning cash and had an arcane corporate structure riddled with potential conflicts. In just the first six months of 2019, WeWork lost $690 million, bringing its total losses to almost $3 billion in the past three years, the filing showed. Now WeWork advisers are estimating the company is worth less than a third of Goldman’s figure.
SoftBank Stake
SoftBank Group Corp. and its affiliates hold about 29% of WeWork stock, Bloomberg reported last week. That’s even more than co-founder and Chief Executive Officer Adam Neumann, though he maintains effective voting control through a three-class share structure.
SoftBank has invested a total of about $10.65 billion into the New York-based company, but that has been at a range of valuations. SoftBank’s Vision Fund invested just once at about a $20 billion valuation in early 2017, while SoftBank Group kept pouring money into WeWork, most recently in January at a $47 billion valuation.
An IPO at a $15 billion valuation would result in a $4 billion writedown for the Japanese conglomerate and a $5 billion loss from the latest reported fair value for the Vision Fund, while a debut at $25 billion isn’t likely to result in losses, Chris Lane, an analyst at Sanford C. Bernstein & Co., wrote in a report. Lane estimates that WeWork is worth about $24 billion, with SoftBank holding a roughly 31% stake.
“If correct this would not imply significant losses on the investment made to date, but would still be a blow to an investment team which is targeting a 40% annual IRR,” Lane wrote. “With investor concern regarding the mid-to-near term outlook for the global economy the timing for this IPO isn’t ideal.”
WeWork needs $7.2 billion over the next four years to see the company through its cashflow negative period, but the total cash needs swell to $9.8 billion if there is a recession in 2022, Lane wrote. Despite the investor concerns, Bernstein remains upbeat on WeWork’s long-term growth prospects and sees it as “fundamentally an attractive business.”
SoftBank’s shares rose as much as 4.3% in Tokyo on Tuesday, while the Nikkei 225 stock average was little changed. The Financial Times reported on SoftBank’s position earlier Monday.
Neumann has been the subject of scrutiny from investors over disclosures in WeWork’s IPO paperwork. The company paid Neumann rent and spent $5.9 million to acquire a trademark he owned, as it lent him money. In recent months, WeWork has sought to address some of its governance issues, including by adding a woman to its board.
Credit Requirement
WeWork has lined up a $6 billion credit line that is contingent on it raising at least $3 billion in an IPO, according to its prospectus.
The company is already considering additional financing. WeWork is planning to rely on junk bonds for funding for the foreseeable future, a company executive said in a meeting with analysts, according to a person familiar with the matter.
The executive said WeWork could also explore whole-business securitizations, or the practice of pledging royalties, fees, intellectual property and other key assets as collateral, the person said. Those types of bonds are becoming more popular. They may enable companies with riskier ratings to improve their credit by cutting financing costs and issuing higher-quality bonds.
More must-read stories from Fortune:
—The bull and bear case for investing in WeWork before its IPO
—Are we near a recession? The godfather of the inverted yield curve says it’s ‘code red’
—How the real time payments revolution is pushing Mastercard beyond cards
—Could Baker Mayfield and Odell Beckham, Jr. be worth more to Cleveland than LeBron?
—Listen to our audio briefing, Fortune 500 Daily
Follow Fortune on Flipboard to stay up-to-date on the latest news and analysis.
