Morning Markets: Concerns are mounting about the viability of WeWork without an IPO. An IPO that seems increasingly unlikely.
Even if it manages to go public, The We Company could need yet more capital before it becomes a self-sustaining business according to a new analysis. The news implies that the firm may need to further lever itself or dilute investors in the future.
And with its IPO struggling to launch, WeWork’s financial health looks increasingly tenuous and externally-driven. That’s not a regular position for a company defending a valuation of nearly $50 billion.
It’s tough days for The We Company, better known by the name of its coworking brand, WeWork. The highly-valued company has faced several setbacks in its attempts to go public, struggling to find a price that was palatable to itself, its myriad backers, and public-market investors it needs to convince to buy its shares.
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The intricate and embarrassing financial dance has led first to an admission that the company’s valuation might be closer to $20 billion than the $47 billion price tag it earned most recently from private investors. Next, WeWork’s potential public valuation was said to slip further, dropping under the $20 billion mark.
Most recently the company’s key backer called for an IPO delay.
SoftBank and its Vision Fund have poured capital into WeWork over the years, driving its valuation — and the implied value of its own stake — north. (SoftBank is raising a second Vision Fund at the moment, making WeWork’s wobbles a double-issue for the company, damaging returns and possibly limiting future investing capital.)
The company’s financial situation without an IPO and constituent debt raise (a $3 billion IPO haul unlocks $6 billion in debt for the struggling coworking giant) looks bleak. Yesterday, in a fit of reserve, I wrote the following concerning the situation:
[Y]ou could argue that WeWork, provided it keeps its H1 2019 pace of cash burn alight, could be short of money [provided no IPO or debt raise] by the end of the year. I am incredibly hesitant to say that idea is fact; the WeWork S-1 is so complicated that I am loath to make declaratory statements regarding financial facts.
However, new work from Reuters details that the situation might be even worse than we calculated.
Indeed, in a Breakingviews column, the publication wrote that even with a $9 billion combined IPO and debt raise, the company would still run short of cash in the time it would take to merely reach operating cash flow parity with a rival that enjoys a far slimmer revenue multiple:
Even with $9 billion more available, he may run out of cash within five years, according to a new Breakingviews calculator. Assume revenue growth declines to 30% by 2023 from just over 100% last year, and that operating cash flow matches profitable peer IWG’s 19% of revenue by the same date. Finally, assume Neumann reduces capital expenditure as a percentage of revenue to IWG’s 17% from WeWork’s 113% in 2018. WeWork will still incinerate $15.4 billion of cash from 2019 to 2023. That leaves a $4 billion shortfall even after allowing for IPO and debt proceeds – and that’s a generous set of assumptions.
Why can’t WeWork slow its growth rate, reduce its burn, and try to make a go of it as a more traditional company, investing operating cash flow back into itself?
First, it would have to have some positive operating cash flow to reinvest. Second, the actions would function as an admission that it was wrong all along, that its growth model was only functional when fueled by infinite external capital, and that its era of growing at 100 percent per year is over. A slower growth rate could slash The We Company’s valuation.
And WeWork would still need more capital. But at a lower valuation, the funds would cost more in terms of dilution, if the company could find private-market investors willing to fund its operations. Such a situation would likely be less than palatable to SoftBank’s crew after they tied up eleven-figures of capital in the company; a stake they can ill afford to see diluted or lose value.
What happens next? Perhaps WeWork takes a huge lump, goes public at a valuation of less than $20 billion, raises its $9 billion or as much of it as it can, and tries to reach cashflow breakeven faster than its doubters think it can? Email in your ideas (email@example.com), I’m a bit lost here.
Illustration: Dom Guzman.