business

SoftBank clinches deal to take over WeWork

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By Anirban Sen, Jessica DiNapoli and Jane Lanhee Lee

SoftBank Group Corp agreed to spend more than $10 billion to take over U.S. office-space sharing startup WeWork on Tuesday, doubling down on an ill-fated investment and paying off its co-founder Adam Neumann to relinquish control.

The deal represents a stunning reversal of fortune for WeWork as well as its largest shareholder, SoftBank, which has committed more than $13 billion in equity to a company that is now valued at just $8 billion.

The bailout comes as SoftBank Chief Executive Masayoshi Son is seeking to convince investors to participate in the Japanese company's second mammoth Vision Fund, for which he is seeking to raise $108 billion.

To stem WeWork's bleeding, SoftBank will need to reverse its widening losses and find a way to make it profitable.

The rescue financing also marks a dramatic fall from grace for Neumann, who as recently as last month was preparing to take WeWork public as chief executive after attaining a $47 billion valuation for it in January.

While WeWork employees now face the prospect of thousands of layoffs, Neumann has secured a $685 million side deal with SoftBank to step down from the board of WeWork's owner, The We Company, according to people familiar with the arrangement

Neumann faced margins calls on his personal borrowings against WeWork's private stock as a result of the collapse of the company's valuation.

SoftBank has agreed to extend to him a $500 million loan to repay a credit line from JPMorgan Chase & Co, as well as pay him a $185 million fee for a four-year assignment as a consultant to WeWork, one of the sources said.

Neumann had drawn down on $395 million on JPMorgan's credit line, another of the sources added. Under the terms of the deal with SoftBank, he must use the proceeds of selling his stock to first repay the loan extended to him by SoftBank, according to the source.

Even though he will give up his board seat, Neumann will get two representatives on WeWork's board, according to one of the sources.

Reuters first reported on Monday that Neumann was negotiating stepping down from the board and would serve as an adviser.

"The consulting arrangement is mind boggling. It’s terrible governance," said Nell Minow, vice chair of shareholder advisory firm ValueEdge Advisors. "Why pay the guy who got WeWork into this mess for advice. It's adding insult to injury and a little more injury too."

Nevertheless, some WeWork investors said they supported the deal.

"Adam is a visionary who has created an impactful company which has transformed the way many people work, live and think. We think he deserved to take some money off the table for his contribution to the company," said All Blue Capital managing partner Matt Novak. He declined to say how big his firm's stake in WeWork is.

SoftBank said will it provide a $5 billion debt package to WeWork, comprising of $1.1 billion in senior secured notes, $2.2 billion in unsecured notes, and a $1.75 billion letter of credit facility. WeWork picked SoftBank's offer over an alternative $5 billion debt package submitted on Monday by JPMorgan.

SoftBank said it will also accelerate a previous $1.5 billion equity commitment to WeWork in the form of warrants that are due in April at a new price of $11.60 per share.

SoftBank added it will launch by the end of the year a tender offer for up to $3 billion to acquire WeWork shares from existing investors and employees at a price of $19.19 per share.

Neumann's ability to tender his shares will be capped at$970 million, one of the sources said. He currently owns a little over a fifth of WeWork, and is expected to retain a stake.

SoftBank said it will own 80% of WeWork following the tender offer, but will not be consolidating the company on its books because it will not hold a majority of voting rights.

SoftBank and its first $100 billion Vision Fund already own about a third of WeWork through previous investments totaling$10.6 billion.

All of the Vision Fund's interests in regional joint ventures with WeWork outside of the Japan will be exchanged for shares in WeWork at $11.60 per share, SoftBank said.

"We hope Softbank can execute on this enhanced vision, through leveraging its strategic partnerships, or otherwise, and bring back value to WeWork's minority shareholders," said All Blue Capital's Noval, adding his firm will be holding on to its stake because it views SoftBank's tender offer price as too low.

WeWork abandoned its initial public offering last month, after investors questioned its large losses, the sustainability of its business model and the way it was being run by Neumann, who gave up his CEO title last month. He had retained his position as chairman of the We Company.

SoftBank Chief Operating Officer Marcelo Claure will succeed Neumann and become The We Company's executive chairman.

"The new capital SoftBank is providing will restore momentum to the company and I am committed to delivering profitability and positive free cash flow," Claure said in a statement.

Artie Minson, previously WeWork’s chief financial officer, and Sebastian Gunningham, who was a vice chairman at the company, are now serving as its co-chief executives.

While Neumann's investors were willing to entertain his eccentricities since co-founding WeWork in 2010, his free-wheeling ways and party-heavy lifestyle came into focus once he failed to get the company's IPO underway.

During the attempts to woo IPO investors last month, Neumann was criticized by corporate governance experts for arrangements that went beyond the typical practice of having majority voting control through special categories of shares.

These included giving his estate a major say in his replacement as CEO, and tying the voting power of shares to how much he donated to charitable causes. Neumann had also entered into several transactions with WeWork, making the company a tenant in some of his properties and charging it rent.

Neumann, 40, is not the first founder of a major startup to be forced to step down recently. Uber Technologies Inc co-founder Travis Kalanick resigned as CEO of the ride-hailing startup in 2017 after facing a rebellion from his board over a string of scandals, including allegations of enabling a chauvinistic and toxic work culture.

"I view this as SoftBank’s moonshot to get WeWork back on all fours," said Eric Talley, professor of law at Columbia Law School. "They realize that Neumann’s continued involvement in the company would be a continued impediment to that."

© (c) Copyright Thomson Reuters 2019.

©2019 GPlusMedia Inc.

12 Comments
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Wework customers will become Softbank customers, eh? The horror! I guess the staff will demand to see customers' visas and passports every time they use the premises, and refuse to issue receipts for their purchased goods and services.

Because that's how I was treated while a much-abused customer of emobile, after Softbank bought it.

-1 ( +1 / -2 )

@JeffLee, I'm with you, I have no idea how a company like Softbank can be so successful, they must have a sideline hidden, because they can't be making money from theit telecoms business.

I don't understand WW either, prime realestate sitting idle waiting for interloper clients, who spend billions developing without long term leases lined up? Banks certainly wouldn't fund projects without lease commitments.

Love to see return on equity figures for WW.

2 ( +2 / -0 )

I am so happy I dumped those Softbank shares at the beginning of this year. After WeWork further drives down their share price, maybe I will look to buy shares again.

Son is an idiot. He keeps dumping money into a project that has an unsustainable business model. Its only real viable use is in times of economic downturn and even then, it becomes a costly service that wouldn't be really utilized. You can't have such lagged profits with consistently high and long term costs.

Jamie Dimon pulled out because they wouldn't accept the lowballed offer.

2 ( +3 / -1 )

@JJJPlane

Jamie Dimon is in it for the fees, he has probably packaged the investment up and sold it off as some kind of derivative already.

1 ( +1 / -0 )

WOW..how many mistakes will SOFTBANK make

wework

make my trip

klook

Soon it would itself be bankrupt.

If you have money that doesn't mean you will keep investing without any due diligence, and invest in tips of the iceberg, invest in the ICEBERG instead.

WAKE UP

-1 ( +0 / -1 )

Neumann made a smart move or two with the SoftBank investment capital. He obtained MeetUp founded in 2002 is a social network co for organizing social events. It has an enormous membership base and Neumann purchased the old Lord and Taylor building on 5th Ave in Manhattan as an expansion space. The Hive office sharing co. I believe has gone global, Wework really is a good idea but it needs to spur innovation by bringing in speakers at the forefront of innovation, offer workshops and open incubators where People can contribute to a innovative project as an investment if their idea is used. It does not always have to be about money.

0 ( +1 / -1 )

It does not always have to be about money.

Then why raise capital? Why not let participants pay their own way, on the go?

Tgere are two fundamental business principles tgat WW is trying to break here: RoE and pricing of risk. Their model doesn't even attempt to say how they intend to replace these principle, other than 'but we're innovative and disruptive'.

0 ( +0 / -0 )

Son is just throwing good money after bad. Everyone talks about Neumann as some amazing visionary because he built a business that appeals to a certain niche like but also loses money hand over fist and was about to go bankrupt if it wasn't for this last infusion? Hell, give me a few billion dollars and I'm sure I could create a company that loses money.

4 ( +4 / -0 )

Sharing an office space is not free. Its cheaper than renting a single tenant space and it has a social network. I believe Wework has over 150,000 tenants sharing office space.

-3 ( +0 / -3 )

Sharing an office space is not free. Its cheaper than renting a single tenant space and it has a social network. I believe Wework has over 150,000 tenants sharing office space.

WW has approx. 5 million m2 of space. Assuming it's 100% utilised (highly unlikely), assuming he gets $500/m2 (also unlikely), is that going to generate enough returns (less costs of doing business) on valuation of the company at close to $50 billion?

At the moment, the cost of doing business is outstripping revenue significantly. That's best case scenario.

Now look at it as it is. The company has liability lease obligations at $47 billions, but lease commitments of only $4 billions. Again basic algebra.

Then there's risks, the company looks like doesn't stack up either side of 10% sensitivities...

GLTH, but I feel for investors (except mr Son).

0 ( +0 / -0 )

Sharing an office space is not free.

Public libraries are indeed free. Plenty of free lancers have long been using them, instead of paying 80,000 yen a month to borrow a chair at a big table in a WeWork space.

0 ( +0 / -0 )

Public libraries are indeed free.

Can you receive calls, mail, and have meetings a library? How about networking? Do they provide high speed internet? Is it business friendly?

Sure, you can work at a public library. But to think it's the equivalent to a shared office is pretty silly. They serve different purposes.

You can shovel a hole with a spoon too. That doesn't mean the spoon is the right tool for shoveling.

0 ( +0 / -0 )

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