From Wall Street’s hottest prospect to financial basket case in a few short weeks, Silicon Valley sensation WeWork is unravelling at lightning speed.
The company line is that plans to join the stock market have been postponed – but there seems little chance of it going public in the foreseeable future. Fund managers wouldn’t touch it with a barge pole.
Firing founder Adam Neumann will allay concerns about governance, as will handing back the private Gulfstream jet. Thousands of job cuts will help stem huge losses.
Yet none of that addresses a far more serious problem – the shared-office provider is running out of cash at a shocking rate. The cancelled listing left a gaping $10bn (£8bn) hole in its balance sheet. Some $4bn was to be raised from the share sale, and a consortium of banks had pledged another $6bn in loans and credit lines if the float went ahead. It has turned again to Softbank for further funding. The Japanese banking giant has already pumped in $9bn, the last tranche at a ludicrous $47bn valuation. Another cash injection will surely value the company at much less. JP Morgan is hoping to persuade lenders to sign up to a fresh financing package. It needs to move quickly.
Fitch Ratings has warned that WeWork’s liquidity position is “precarious” and downgraded its bonds further. Analysts at Bernstein predict that the company will run out of cash in the first half of 2020 if it burns through readies at the current rate of $700m a quarter. According to reports, more money is needed by the end of November. WeWork lost $1.9bn on turnover of $1.8bn last year, taking net losses to $4.2bn since 2016.
Its UK business didn’t fare much better. According to accounts filed for WeWork International, losses ballooned to £75m last year from £8m, as administrative expenses spiralled from £26m to £110m. The UK arm doesn’t generate rental income from its properties. Instead, it charges a “management fee”, which doubled to £35.8m last year, despite losses jumping nearly ten-fold.
The fortunes of WeWork and the London property market are closely linked. WeWork is the capital’s biggest office occupier, and London is its second-biggest market after New York. Previous accounts have revealed that WeWork has UK rental commitments of £3.2bn over the next two decades.
How did a company in such a position come so close to joining the stock market? Thankfully, the 350-page prospectus published weeks before the planned share sale laid bare gigantic liabilities, loans to its founder, a complex corporate structure that handed tax benefits to Neumann and other key backers, and mission statements that would make even the most loyal Silicon Valley acolyte blush.
WeWork is not only “changing the way people work globally”, but “elevating the world’s consciousness”. As for Neumann’s wife and co-founder Rebekah, she is his “strategic thought partner”. There were 30 pages on “risk factors”, including $47bn of lease obligations versus guaranteed revenue of just $4.2bn. As one wag puts it: the prospectus was less a financial document and more performance art.
Hope for the high street
Listen to any major retailer talking about the high street and you would think there is no future for bricks and mortar stores. The big chains are hurriedly building online operations, usually at the expense of shops. Bank branches, post offices, and other important services are disappearing too, to the severe detriment of towns and cities up and down the country.
Yet, there are grounds for hope. HMV has opened a 25,000 sq ft site in Birmingham housing 100,000 CDs and LPs, and 60,000 DVDs. New owner, Canadian entrepreneur Doug Putnam, said he was “a firm believer” in British high street retail. BT is returning after a 17-year absence with a promise to provide “good, old-fashioned” customer service. The telecoms giant is revamping 615 EE phone shops.
Vodafone is investing in its 400 UK stores and has plans to open another 75. Meanwhile Sunderland’s Hays Travel has taken a huge bet on the high street with the purchase of Thomas Cook’s entire 550-strong estate. The start of a mini-revival, perhaps?