Two years after WeWork’s dramatic attempt to become a state-owned company failed, the coworking giant began trading on the stock exchange on Thursday, hoping investors will now believe in its prospects.
The previous effort was met with concerns about WeWork’s meteoric growth, huge losses, and the alarming management style of co-founder Adam Neumann. WeWork has new executives who have cut spending and hope to tap into an office space market disrupted by the pandemic. But the company still has ambitious growth targets, big losses and many empty offices at its 762 locations around the world. And WeWork has only survived for the past two years thanks to huge financial backing from SoftBank, the Japanese conglomerate that is WeWork’s largest shareholder.
“We arrived here on a different route than we planned, but here we are,” Marcelo Claure, executive chairman of WeWork and senior executive of SoftBank, said in an interview Thursday with CNBC.
Instead of an initial public offering, WeWork entered the public market by merging with a specialist acquisition company, or PSPC, which is a big hit these days. He is expected to raise up to $ 1.3 billion from the deal, an amount that includes stakes held by investment firms BlackRock and Fidelity. In Thursday’s stock price, WeWork was worth around $ 9.5 billion, a fraction of the $ 47 billion valuation placed on the company before investors degrade there in 2019.
PSPC shares, known as BowX, were trading around $ 10 this month. New WeWork shares – with the ticker WE – on Thursday closed at $ 11.78.
WeWork rents office space and charges membership fees to customers – including freelancers, start-ups, and small and large businesses – to use it. Its business is based on the belief that people might prefer the flexibility of such an arrangement to a traditional office lease, which can last for years and have other onerous terms.
While flexible office space isn’t new, WeWork said their company can not only revolutionize the way people work, but also change the way people live and think. Mr Neumann attracted billions of dollars in investment, the largest from SoftBank, which ended up bailing out WeWork when it pulled the 2019 IPO and was in danger of bankruptcy.
Investors in WeWork must judge whether SoftBank will use any increase in the share price to sell part of its 61% stake.
SoftBank may be eager to recoup the $ 16 billion it invested in WeWork, a sum that combines nearly $ 11 billion in equity investments, $ 5 billion in debt financing, and payments to Mr. Neumann.
“I made a bad decision,” Masayoshi Son, Managing Director of SoftBank, said last year. “I didn’t look well at WeWork.” SoftBank has agreed to limit its voting rights in the company to less than 50%. SoftBank and other investors have to wait several months before they can sell their shares.
The pandemic, which has emptied office towers across the world, has also crushed WeWork’s business.
Traditional landlords survived because tenants were legally obligated to continue paying their one-year leases, most of which remain in effect. But WeWork customers were able to cancel their much shorter-term agreements when they expired. WeWork’s revenue in the second quarter of this year was $ 593 million, well below the $ 988 million in revenue it reported for the first quarter of 2020, its record quarter.
And that partly explains why the company uses cash rather than generating it. In the first half of this year, WeWork consumed $ 1.31 billion in cash to run operations and purchase goods and equipment, more than $ 1.15 billion for the same period of 2020.
Still, WeWork has made strides in reducing its operating expenses – and is hoping it will become profitable if its revenue grows. Some of the biggest savings come from renegotiating leases with landlords or terminating them.
Sandeep Mathrani, chief executive of WeWork, said this month that the company has terminated more than 150 full leases and made 350 lease changes so far this year. “What we did during the pandemic was correct the cost structure, the right size of the business,” he said Thursday in an interview with CNBC.
Perhaps the biggest question hanging over WeWork is whether it will suffer from the downturn in some of the largest office markets or find an opening in a world of work reshaped by the pandemic.
Occupancy levels in office towers in cities like New York, Chicago and San Francisco, among WeWork’s largest markets, are still far below pre-pandemic levels – and may never return to where they were, many companies allowing employees to work entirely or partially from home. In this environment, companies free up their spaces when the leases expire or sublet them. As a result, record amounts of office space are thrown onto the market and rents have plummeted.
This could harm WeWork in several ways, according to industry experts. Fewer workers coming to cities means less business for all office space operators, including coworking companies. Falling office rents could undermine WeWork’s appeal and reduce what it can charge.
John Arenas, managing director of Serendipity Labs, a flexible office space company, said urban coworking companies face “competition from subletting, as well as resistance and uncertainty about returning to work.”
WeWork has a lot of empty desks. In the third quarter, it had 461,000 memberships and 764,000 physical offices, which translates into an occupancy rate of 60%. That’s down from 85% in mid-2019, but up from 45% at the end of last year.
WeWork could benefit if companies that cut back on traditional leases decide they need flexible spaces when they want employees to meet in one place.
And WeWork management says the companies they interact with want 20% of their total space to be flexible, in theory providing solid demand.
WeWork predicts that revenues will more than double by 2024 and that memberships will increase by more than 50%.
If all of this happens, Mr. Neumann, who left WeWork under a cloud during the 2019 IPO attempt, would benefit. His shares in the company are worth nearly $ 690 million at Thursday’s closing price. He also holds a type of option on WeWork shares worth over $ 230 million at the share price. By combining that with the more than $ 800 million he received for leaving and relinquishing control of the company, Mr. Neumann could one day rake in over $ 1 billion from WeWork.
“Adam is just another shareholder,” Claure told CNBC.