As WeWork’s single biggest investor, owning around 29% of the co-working office space management company, the company has relied on cash injections from Softbank’s Vision Fund to fund its expansion for a number of years now. The plan was for that relationship of dependency to have ended last month through a much anticipated mega IPO. However, those plans were forcibly shelved after it became clear that public market investors were sceptical over WeWork’s business model, rate of cash burn and especially corporate governance issues related its unorthodox co-founder and CEO Adam Neumann.
As a result, WeWork quickly needs to find more cash again and the likely result of that is a funding package that will again look to Softbank’s huge resources. If Softbank agrees to plough yet more funds into the company, this time it will also be handed effective control of WeWork as its majority shareholder. And majority holder of the voting rights attached to the company’s issued shares.
The deal is still some distance from being done though and We Company, the holding behind the WeWork brand, also has a competing funding proposal from JP Morgan, the US investment bank. However, with Softbank having already invested $10 billion in the company and owning close to a third of it, it is believed the preferred option will be for them to up their stake.
At the end of June, WeWork held about $2.5 billion in cash. But with losses over the first half of the year a massive $2.4 billion and $1.9 billion over 2018, that will not last long even with aggressive expansion put on ice. And that appears to be far from the case. An incredible 94 new WeWork locations were opened over the three and half months to October 9th, taking the total to 622 in 123 cities. That shows no signs of a slowdown from the first half of the year, when 97 new co-working spaces were opened.
Over the first half of the year, according to the IPO prospectus, the average cost to WeWork of opening a new office location was $2.63 million. It doesn’t take a mathematical genius to work out that despite plans to cut thousands of jobs and offload non-core businesses such as its apartments-letting service and a New York school, the company will be out of operating cash within a few short months, even if expansion is put on ice.
Short positions on the company’s debt hit a high this month after ratings agencies downgraded its credit rating to comfortably into the ‘junk’ zone. Short positions make money if the company’s issued bonds start to be traded at prices lower than their face value or trading value at the time the short is taken.