In venture capital, the first investment in a startup is almost always the most gainful. Not so for SoftBank Group Corp.’s funding in WeWork. In that case, SoftBank’s best deal was it’s last. It’s an unusual culmination of a strange and sometimes-irritated partnership between the two firms. SoftBank will definitely get a chance to begin regaining some of the more than $17 billion it flowed into WeWork when the company lists its shares on the New York Stock Exchange as soon as this week.
The network of share purchases, convertible loans, warrants, tender offers and letters of credit (some renegotiated) make it challenging for analysts to tell whether or how SoftBank could ever adopt a profit on its investment. Spokespeople for WeWork and SoftBank refused to comment.
After so much went wrong, SoftBank would need to go right to make money on the startup. WeWork would need to obtain a vast portion of the post-pandemic workforce and hope that flexible offices take the place of many corporate campuses and home workstations, stated David Gibson, chief investment advisor at Astris Advisory Japan. It would need to improve its financial situation dramatically, too. Still, “it’s possible,” Gibson said.
Success for SoftBank could easily mean breaking even, said Alex Snyder, a portfolio manager at CenterSquare Investment Management, a real estate-focused investor that doesn’t own shares in WeWork, SoftBank or their rivals. “Coming out, more or less, whole—given the WeWork saga—could be a win in people’s minds,” he shared.
The saga started in 2010, when Adam Neumann co-founded a co-working space in New York. Investors lined up after him, drawn to his infectious faith and big goals. Masayoshi Son, the founder of SoftBank, became one of them in 2017 with an initial outlay of $4.4 billion in a deal valuing WeWork at $20 billion. In January 2019, SoftBank shifted the valuation to $47 billion.
An effort to sell an initial public offering later that year was a disaster. Wall Street rejected the proposed valuation, the ballooning losses and Neumann’s apparent conflicts of interest, including questionable transactions and loans he took from the business. Neumann was ousted, WeWork almost went broke, and SoftBank bailed the company out with more than $5 billion in new financing.
SoftBank’s choice to save WeWork, rather than let it collapse as SoftBank would later do with Katerra Inc. and Greensill Capital, is noteworthy. SoftBank was on the hook for a $1.5 billion warrant it had already promised WeWork. Son told investors two years ago that he looked into getting out of it but couldn’t extract SoftBank from the commitment. So he piled more cash into the beleaguered company, including $5.05 billion in debt and guarantees and a $1.5 billion settlement that reworked a tender offer to purchase shares from Neumann and others.
At that point, SoftBank also negotiated a better deal. WeWork agreed to decrease the price of shares bound to the previously promised permit to $11.60 each, from $110. And as part of a $1.75 billion credit guarantee and $2.2 billion in senior unsecured debt, SoftBank got the right to buy shares at 1 cent each. Earlier this year, it purchased 130 million shares at a penny each. It gets 40 million more of those penny warrants when WeWork lists and another 12 million if the letter of credit is extended in 2023.
WeWork will start trading at around $10. Considering the company ultimately pays back the debt, SoftBank’s gain on those warrants could be substantial—far in abundance of any of its other investments in WeWork.
The public valuation for WeWork will be nearly $9 billion, less than a fifth of what SoftBank funded in 2019. But because of accounting rules, SoftBank will essentially start with a clean slate. WeWork’s weakest point, according to SoftBank disclosures, was in early 2020—after the botched IPO and at the start of the Covid-19 pandemic. For the quarter closing in March 2020, SoftBank assigned WeWork a valuation of $2.9 billion, and SoftBank shareholders behaved accordingly.
“To some degree, they’re starting over,” said Snyder. “They get carte blanche.”
If WeWork functions as outlined by its executives, it could hit $1 billion in earnings before interest and other costs by 2023. If the market starts valuing the company in line with other franchised businesses such as hotels, then the company could conceivably hit a valuation worth $15 billion by 2023. At that point, SoftBank, which will have an approximately 56% ownership stake after the listing, will be getting closer to breakeven.
Of course, that’s counting on perfect execution. WeWork’s business model rests unproven, said Aswath Damodaran, a professor of finance at New York University’s Stern School of Business. Its substantial long-term rent responsibilities and short-term tenant contracts muddy the prospects for the corporation to turn a profit. “SoftBank will not make money on WeWork,” Damodaran wrote in an email. “The unanswered question is how much they will lose.”