WeWork Prepares Board Fight to Force Softbank to Comply
WeWork’s board can whine but it's working without a net & SoftBank has its own troubles. WeWork bonds: look out below.
The We Company (WeWork) (WE US) is gearing up for battle to force Softbank Group (9984 JP) to complete its outstanding $3 billion tender offer for WeWork's foundering equity, which I have valued at zero since last fall.
And that was long before COVID19 hit and plunged global markets and economies into record and potentially protracted declines.
So, I expect, WeWork will lose.
Whatever Softbank may spend to defend a lawsuit from WeWork pales versus billions it could spend to try to keep WeWork alive—which seems increasingly unlikely.
Softbank is over its WeWork infatuation
I've been warning for months that the Softbank's takeover of WeWork may be in jeopardy (most recently in “WeWork's Mounting Losses Send Softbank Scrambling For Alternative Financing” on 2/20/20).
Last week came the first confirmation that at least parts of the deal may be unraveling when The Wall Street Journal reported sources close to the deal saying Softbank is pulling out of its agreement to buy up to $3 billion in WeWork stock.
I discussed the news with Smartkarma Research last week:
Smartkarma also collected my Bond Angle reports on WeWork/Softbank since last summer into an e-book that Financial Times’ Leo Lewis called “seriously good reading.”
Softbank's tender offer has been outstanding since November and was due to expire April 1st, though I have expected it would be extended and possibly pulled altogether.
The situation is fluid but not surprising since, by my estimation, WeWork's operating performance remains dismal and its prospects are worse.
As I wrote back in October:
“I also have estimated in WeWork's equity value at zero in bankruptcy, with bonds impaired, and worth less than 1x '19 estimated revenue ($3.3 billion) as a going concern which, as I have noted, gave Softbank few options--all ugly (Softbank May Blink First (WeWork Bondholders Hope) on 10/14/19, and The Tide Is Out and WeWork Bondholders Are Naked on 10/7/19).”
Financial Times reported Softbank “told shareholders it had the ability to withdraw from the agreement if it could prove investigations by the Securities and Exchange Commission or the US attorney-general for the Southern District of New York would have a “material adverse effect” on the company, or result in a “material liability” to SoftBank or its Saudi-backed Vision Fund.”
This makes sense. WeWork’s precarious financial condition only came to light months after the withdrawal of its IPO, and potentially after Softbank agreed to terms of the rescue plan on October 22nd.
As I wrote in WeWork Is Foundering While Softbank Struggles With Its Bailout on 11/27/19:
“WeWork selectively revealed recently that it was producing massive and accelerating losses during the third quarter even as it was peddling its failed IPO and fighting the SEC's objections about missing and misleading disclosures [in the S-1 filing], including bogus performance metrics (as I warned in The Tide Is Out and WeWork Bondholders Are Naked, 10/7/19).”
I’ve also warned that this was the same stunt WeWork pulled in April 2018 when it sold its unregistered bonds, which are not subject to SEC reporting requirements, and then later reported poor performance for the quarter (see Gravity Works As WeWork Doesn't; Now Plan B, 9/17/19).
It's possible Softbank has become increasingly frustrated since October trying to get accurate and comprehensive financial information from WeWork, not helped by horrific fourth-quarter results which likely were particularly startling given how bad the third quarter proved to be.
The SEC and DoJ investigations have been ongoing since last fall.
Still, WeWork might argue that Softbank, as a recurring investor for years even at ridiculously inflated values, should have known what it was buying.
Fair enough.
Softbank has been called out by its investors and its banks for being grossly irresponsible with its ill-advised investments in WeWork.
Nevertheless, WeWork is not excused for providing investors with years of grossly inadequate and deliberately misleading financial statements and guidance.
Softbank May Be Done With Saving WeWork
Softbank is no doubt completely aware that its deep-pocketed devotion has been the only thing keeping WeWork afloat. And it hasn’t been enough.
Moreover, it's increasingly doubtful that it can—or should—be saved.
Remember, WeWork has been an illusion from the start (see Gravity Works As WeWork Doesn't; Now Plan B, 9/17/19):
It’s not a tech firm, it rents commercial real estate via a co-working concept that has been around since the 60s. Its astronomical $47 billion equity valuation before the IPO was announced, largely driven by Softbank, was never justified.
And after operating more than 10 years during the longest economic recovery on record WeWork has never achieved anything close to operational or financial stability, nor is it likely to in the foreseeable future.
WeWork still sets cash on fire as soon as it comes, including the $1.5 billion Softbank wired to it in October (see WeWork's Mounting Losses Send Softbank Scrambling For Alternative Financing, 2/20/20).
It's no coincidence Softbank just installed bankruptcy and turnaround veteran Sandeep Mathrani as WeWork's new CEO.
WeWork has been out of cash since year-end, by my estimate, and it burns $2-3 billion per quarter.
But its $50 billion in long term leases are the greatest obstacles to WeWork's survival. They also are evidence that its counterparties remained wary of its escalating risks:
WeWork overpaid for rental space and was forced to take longer and longer leases to get deals signed, which also drove up local pricing for commercial space all over the world. WeWork broke those markets too.
Now we are heading into what could be a historic economic slowdown in which landlords can’t lease the space to anybody else. From their perspective, they may find it more useful to keep WeWork as a foundering renter for as long as possible while still reporting their buildings as occupied, but are not necessarily compelled to renegotiate lease terms until they see demand recovering.
WeWork’s business model has never been tested under distressed conditions, until now. And it fails as I expected.
Revenue is, by design, able to evaporate overnight during market/economic strife by customers who were attracted to this very flexibility.
Combine this with WeWork’s dramatically excessive cost structure mostly from untenable lease expenses plus nominal tangible asset value at best. What’s left is mostly vapor with no prospects for breakeven for years and nothing to attract buyers.
WeWork's business is easily replicated by better-capitalized competitors who now find it easier to compete against WeWork's damaged brand.
$50 billion in lease obligations—even half that—probably are an insurmountable hurdle that prevents WeWork from being sold.
A liquidated WeWork won’t be missed by a now rapidly shrinking market which may remain under pressure for the next year or more.
I have maintained that WeWork’s banks have known this for years. That’s what I detected last year from terms and pricing for new credit facilities the banks arranged ahead of its failed IPO (see Gravity Works As WeWork Doesn't; Now Plan B, 9/17/19, and subsequent reports).
WeWork’s legacy banks have continued to demand much more expensive terms as compensation for increased risk while also actively reducing their exposure.
That’s the bottom line with WeWork—its primary stakeholders have been well aware of its risks but now the gravy train is over.
The Damage is Done
While some observers speculated last week that Softbank may just be posturing to get better terms on WeWork’s bailout since the markets have plunged on the COVID-19 calamity, I remained convinced that Softbank is ready to let WeWork fail.
I detailed again in my last report that Softbank’s expensive WeWork obsession has alarmed its banks and shareholders and damaged its financial condition. Even its weak “BB” credit quality rating is at risk now after Standard & Poor’s put it on “negative watch.”
As a result, it doesn’t have cash to spare and its banks refused to loan the $3 billion it needs to fund its outstanding tender offer for most of the WeWork’s remaining equity (see WeWork Is Foundering While Softbank Struggles With Its Bailout, 11/27/19 and subsequent reports).
Worse—every penny of the now more than $12 billion Softbank has invested into and/or loaned to WeWork has essentially evaporated.
The adjusted $2-3 billion book value of its investment that remained last October after Softbank wrote down WeWork’s equity value to less than $8 billion back in October, ambitiously generous at the time, is worthless by my calculation.
Spending another $3 billion to buy most of WeWork’s remaining equity makes zero sense. This doesn’t count the $3.3 billion in bonds Softbank agreed to arrange after the tender is completed, or the $1.75 billion letter of credit facility Goldman required Softbank to co-borrow with WeWork before it would arrange deal back in December—both deals remain in limbo.
Then WeWork will probably need billions more in additional cash support over the next several years to stay afloat, which seems futile, and potentially millions more for legal settlements and regulatory fines.
Instead, it appears Softbank has chosen self-preservation. The company just announced a major recapitalization, including selling up to $41 billion of such lucrative stakes as Alibaba to pay off debt, buy back $18 billion in stock, and bolster cash.
It may not be enough. Softbank may also be struggling to find another $10 billion it’s been trying to raise from outside investors to bolster its struggling Vision Fund plus several other investments besides WeWork now close to failing.
Softbank's selling now such astronomical amounts of its best assets to buy back its own comparatively less valuable stock even after historic drops in their market value over the past month seems to confirm the desperation I have noted. I’m not alone. Financial Times reported tonight that "Leon Black’s Apollo Global Management hedge funds have placed a sizeable short bet against [Softbank’s] bonds.”
Go Ahead. Sue.
So there’s a good chance WeWork’s saber-rattling at Softbank may turn out to be hollow noise.
With Softbank already WeWork's most important investor and now comprising half of its board, these discussions have been ongoing for months apparently without resolution.
WeWork has little if any bargaining power and can hardly afford an expensive, long-term legal action against Softbank. Whether or not Softbank would lose in court, which is not guaranteed, it seems better served to let WeWork file bankruptcy even though this could mean liquidation.
Softbank might consider writing off the remaining $2 billion or so in WeWork book value as cheaper now versus buying $3 billion in additional worthless equity.
We should know soon—WeWork is running out of time.
I have warned for months that risk for WeWork bonds remains acute. The bonds are down 37 points since my last report to 52.2 (24.9% ytw; 2442 bps), with substantial downside risk remaining given my estimate that the bonds may be as much as 100% impaired. I continue to expect WeWork will pursue a comprehensive capital restructuring, bankruptcy, or even liquidation unless the company can renegotiate tens of billions locked up in expensive long-term leases WeWork can't afford—which seems unlikely. Upside potential from a near-term rebound in operations or business conditions or company sale seems unlikely. Maintain “Sell.”
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