WeWork Attempts To Stage Its Redemption On The Public Market

Summary

• WeWork is finally going public after its failed 2019 IPO.
• The pandemic has created an unexpected tailwind with enterprise clients for the flexible workspace company.
• With revenues expected to rise significantly in the years ahead, WeWork looks to finally realize a profit.

Sundry Photography/iStock Editorial via Getty Images

WeWork’s (BOWX) woes as a private highly valued SoftBank-funded company are well documented, mostly centring around ex-CEO and cofounder Adam Neumann's excesses. What came after the fall of a company that was previously one of the USA's most highly valued and well-known startups was divestments of non-core businesses, a brutal cost-cutting, and a strategic pivot. Neumann was out, and Sandeep Mathrani was in. And the new leader, previously the CEO of Brookfield Property Partners, now faced the Sisyphean task of turning around a failing company with a historically uneconomical business model.

Then the pandemic hit.

So WeWork found its business yet again unraveling as rolling quarantines and stay-at-home orders kept people shut indoors, largely out of sight of the urban centres that had since WeWork's founding in 2010 graced beautifully designed co-working spaces. The move to become a public company via a merger with special purpose acquisition company BowX Acquisition Corp, could not come sooner.

With the pandemic largely contained through the ongoing vaccination campaign, WeWork needs to seize the opportunities that will arise from the new age of working. This is built on hybrid working models where larger companies increasingly use flexible workplace solutions for their workforce.

The Pandemic And The Future Of Work

WeWork has shifted its focus to enterprise clients which now form 50% of the total memberships of its 850 locations. These are spread across 150 cities in every continent in the world.

Source: WeWork March 2021 Investor Presentation

While small and medium-sized businesses will still play a role in the company's post-pandemic revenue mix, WeWork is aiming for at least 65% of revenues to come from its enterprise clients like Amazon, Microsoft, and Spotify. The pandemic has upended the traditional ways of working, forming a tailwind for flexible workplace solutions.

Source: WeWork March 2021 Investor Presentation

The move to enterprise clients comes with the benefits of longer-term leases which would make revenues more stable and predictable on the back of the underlying cost to WeWork for its brick-and-mortar locations.

Source: WeWork March 2021 Investor Presentation

The average commitment length has increased to 15 months in 2020 from just 1 month in 2015. The benefits for its enterprise tenants with case studies in Seattle and Amsterdam confirming a 24% and 27% cost saving respectively versus traditional office leases. With the pandemic uprooting conventional approach to offices, WeWork's cheaper flexible office spaces place it a positive future path to capitalize on the large global office property market.

Source: WeWork March 2021 Investor Presentation

The company is targeting 1 million in consolidated total memberships in fiscal 2024 for revenue of $7 billion and adjusted EBITDA of $2 billion. This excludes figures from its ChinaCo, which WeWork sold its majority stake for $200 million in 2020.

The company expects revenue for fiscal 2021 to stay flat year-over-year at $3.2 billion with a negative adjusted EBITDA of $900 million realized in the same year, a significant improvement on fiscal 2020 negative adjusted EBITDA of $1.8 billion.

Source: WeWork March 2021 Investor Presentation

WeWork expects to reach positive adjusted EBITDA for the first time in the fourth quarter of the current fiscal year with an adjusted EBITDA profit of $8 million. This is as its cost-cutting efforts, a renewed focus on enterprise clients and rising demand for flexible workspaces post-pandemic all work together to improve its financial standing.

Source: WeWork March 2021 Investor Presentation

The company has guided for continued positive adjusted EBITDA in the years ahead with $485 million expected to be realized in fiscal 2022 and $1.36 billion in fiscal 2023. Hence, with an $8 billion market cap once the merger closes, WeWork currently trades on a price to 2021 sales multiple of 2.5x. The company does hold total debt of around $3 billion but expects to raise $1.8 billion in cash from its go-public merger. This opens up a key risk that the company will likely be dependent on equity raises in the future if redemptions by BowX shareholders are as high as that of other recently closed deSPACs.

SoftBank’s $47 Billion Valuation In The Post Covid Era

I expect WeWork's shares to decline somewhat steeply post-merger close, not just because this would mirror other recently closed deSPACs, but because the company's financials, though improving, are still somewhat suspended in a state of discombobulation. Expected positive adjusted EBITDA might not materialize and the company could find its cash balance lower than expected. The high debt also means significant interest expenses in the years ahead unless WeWork is able to translate future demand for flexible workspaces into strong and consistent free cash flows.

As a private Softbank-funded company WeWork reached a peak valuation of $47 billion. While future shareholders in the soon to be public WeWork will hope the company will once again reach this, it will likely take some time and a lot more hard work by management to get to and retain profitability. I won't buy shares now, but will probably do so once the merger is complete and the valuation likely settled somewhat lower from its current $10 base. WeWork has a strong brand name that looks set to ride to coattails of the flexible working revolution.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Maschuette]

And it begins...WE submitted an S-1 with the SEC at midnight last night. They are going to do a 1/2 billion dollar equity raise which is what the author was afraid of.

[SPACSpook]

@Maschuette please don't be chicken little, the sky is not falling 😀. After the IPO closed last month, they are just now registering with the SEC, the public shares issued related to the warrants and WeWork private shares. These are not new shares.

[Maschuette]

@SPACSpook for real?

[Maschuette]

Wow, i think you're right. Thats weird that they do it afterwards. I just got burned by another SPAC and now im jumpy. My bad

[SPACSpook]

Hope some of you ignored the naysayers and picked up some 2025 warrants under $2 last week as I did the past few weeks. Took some profits at $2.60 today but staying long for the bulk of the position for a 2-3 bagger in a couple of years. WE trading a 11.50+ today!

[SPACSpook]

We got our 2 bagger much sooner than we expected, the second day after the IPO 😀 . Took half off the table and will let the rest ride.

[User 53354542]

It would have been helpful if you had expanded on the qualitative comments about why the shares will fall immediately. WeWork is posting $2 billion in losses every year. Even when it posts $2 billion of revenues it has $2 billion of variable operating costs and $2 billion of fixed real estate expenses. While the company claims it will keep bringing down the variable costs, there is no way it can do anything about the fixed real estate expenses. They have signed 15 years worth of leases where they owe over $30 billion in total rent (roughly $2 billion a year) to the office landlords. WeWork will somehow have to magically double (100% increases) it’s revenues to $4 billion before it can stop losing money for its shareholders. That is never going to happen in this new world of remote working and relocations out of cities like New York and San Francisco. BOWX SPAC investors should VOTE AGAINT this acquisition of WEWORK and get their $10 a share back before it becomes $5 a share or even less.

[Aminator]

I don't know that the BOWX shareholders will be the ones to sell, not least because many are bagholders from $14. Or the PIPE. It's the other 81% though that we need to look out for.

[Mulder3535]

@Asset_light_stocks lol completely wrong!! This is no longer the bust it was. If this ipo'd normally? You're looking at a 30-40 stock. A spac is making this super cheap at $10! No way a company this size deserves a $5 share price... watch n learn...

[User 53354542]

@Mulder35 Mulder35 can you provide me one fundamental valuation driven argument for your price target?

[Aminator]

Agree with you - it will fall before it rises in price, if at all.

WFH is a thing, and those revenue increases seem a bit fantastical, considering their revenue was halved in Q1 and they lost 200k clients. Increasing occupancy and cost-cutting should totally be the focus, and should make them profitable so their EPS numbers should improve a lot. However, that does not much to the top line.

Their Investor Day tomorrow will be interesting.

[Mulder3535]

@Aminator you're both wrong. This article is a hit piece disguised as bullish. Drop significantly lower after the 10 merger price based on what? Because most spacs have? Ridiculous... this will have a major jump this month and it's trading cheaply at 10. Valuation is LOW for this and we all know it...see you guys in November and see who was right... ty

[Aminator]

@Mulder35 Mulder35 think of it this way - why us price stuck at $10 and not moving anywhere? Because there is a natural floor created by the way SPACs work. If prices could move freely, which direction would it go?

Up? Nope - it would have moved up already otherwise, which it is free to do.

That leaves "down," unless you think WeWork is perfectly priced at $10.

Note that if redemptions are high, they will have to issue float which will tank the price even more. I'd give it a PT of $3-5 at most, at this stage .

[SPACSpook]

@Aminator
They raised 800 million PIPE at $10. So that is your floor.

You are not going to get the 3-5 you are hoping for.

www.wsj.com/...

"The planned merger with the BowX Acquisition Corp. BOWX +0.20% SPAC values WeWork at $9 billion including debt, the companies announced Friday. As part of the deal, WeWork plans to raise $1.3 billion, including $800 million in what is called a private investment in public equity, or PIPE, from Insight Partners, funds managed by Starwood Capital Group, Fidelity Management, and others."

Before Covid Delta, WE private shares were valued at around $18 back in March and even BOWX was around $14. It tanked due to Delta but Covid Delta is getting under control all over the world. The investor update today was very positive with growth picking up. After the WE/BOWX transaction closes, BOWX SPAC sponsors are going to be owning 1.3% of the float, BOWX public shareholders 6.7%, PIPE 11.2%, former WeWork shareholders 80.8%. Except for the SPAC sponsor, everyone else paid $10 or more and has no reason to sell at even $10. So at most, we are looking at 1.3% SPAC redemption as I understand it. I think institutions will pick it up no problem with a growing business.