Morning Markets: How low can The We Company’s valuation slip before the IPO is called off? And then what?
The We Company, better known as WeWork, is a cash-hungry company. And its fight to feed itself is generating longer odds by the day. Between a debt offering and an IPO, the company is on a mission to raise around $10 billion. That sum is astronomic and increasingly close to the amount of money that the company itself may be worth.
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According to reporting from the Wall Street Journal, “WeWork’s parent is eyeing a valuation for its initial public offering that could fall below $20 billion,” the $20 billion figure is already a massive cut from its final private valuation and a figure previously tipped as a possible compromise between the company and Wall Street.
If WeWork managed to go public, say, worth $18 billion, it isn’t inconceivable that the firm would be worth less than the combined debt and equity capital it had raised by that point. (The firm’s new debt is contingent on an IPO of sufficient size, making the two a sort of package deal.)
Unspooling WeWork’s venture, debt, and private equity history is difficult. Between country-specific subsidiaries, warrants, two different pools of SoftBank money (the company and its Venture Fund), not to mention traded bonds, debt rounds, and the potential for a new credit facility along with an IPO, it’s complicated. But the firm has raised more capital than $8 billion (debt and equity) to date, and if you add the $10 billion that WeWork seeks, you get a number that sounds dangerously similar to its potential valuation.
How did WeWork get here? A mixture of opaque financials, high-costs, rapid growth, and a lack of focus. You can still write a bullish case for WeWork, mind, but the market is rapidly repricing a firm, giving us, mere scribes, more than sufficient cover to ask pointed questions.
Like if the IPO will happen at all. The Journal notes in the same piece that there are some calls to pull the IPO. Of course, if the IPO is even delayed, how WeWork doesn’t get into trouble is hard to see. Here are a few numbers regarding its cash supply and consumption from its IPO filing:
- WeWork cash and equivalents, June 30 2019: $2.47 billion
- WeWork net cash used by operations, H1 2019: $198.7 million
- WeWork net cash used by investing activities, H1 2019: $2.36 billion
As you can see, the latter two sum to a higher number than the former. Or, in more pedestrian English, you could argue that WeWork, provided it keeps its H1 2019 pace of cash burn alight, could be short of money 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. But, the numbers at least look bad for a firm that could be forced to punt on a $10 billion combined debt-and-equity fundraise that it was likely expecting to use to fund its continued, high-burn growth.
WeWork’s valuation is coming down as its cash needs are at reported–and, possibly, all-time– highs. For a company looking at a slimming IPO at best, this is dangerous history to lean on:
Illustration: Dom Guzman.