10 big things: The strange world of WeWork

By Larissa Fernand |  10-09-19 | 
 
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Larissa Fernand is Website Editor for Morningstar.in. She would like to hear from you and welcomes your feedback.

The Wall Street Journal reported that WeWork's parent company, the We Company, is considering an IPO valuation below $20 billion. That is significant because the company was valued at $47 billion from private fundraising in January.

The We Company filed its first IPO paperwork in August. And there is no amount of skepticism surrounding the unprofitable business and the financial dealings of co-founder and CEO Adam Neumann.

The company announced that it had received $5.9 million from Neumann--which it had paid him for use of the word we, a trademark Neumann had acquired through a private company.

Rodney Hobson,  a columnist for Morningstar.co.uk, notes that founder Adam Neumann leases buildings to WeWork. WeWork proposes to buy the buildings off him but I worry about how independent the valuers will be. Also, WeWork has lent Neumann money to buy its shares, which is even more worrying. As he is the majority shareholder, new investors will be powerless. But investors with more money than sense have already pumped in $13 billion.

Even though the stock is not listed in India, it has captured the attention of the Indian investor. Numerous companies like Lyft, Uber and WeWork are going public without having profits. According to Vox.com, in 2018, 81% of U.S. companies were unprofitable in the year leading up to their public offerings.

Kevin Dowd, who writes about private equity at Pitchbook, dug into the 350-plus pages of WeWork’s IPO filings. He noted with dismay the absence of the phrase "community-adjusted EBITDA" anywhere within WeWork's IPO prospectus. But he also came up with other interesting observations.

Read them here.

1. The most obvious question about WeWork is how it plans to make a profit. The New York-based company's IPO filing revealed run-rate revenue of US$3.3 billion, up 86% YoY, which is great; it also reported a net loss of more than $1.9 billion for 2018, which is more than twice as much as the company lost in 2017, which is in turn more than twice as much as it lost in 2016. That part is not so great.

2. The future "profitability profile" WeWork outlines in the prospectus is based on its existing locations maturing and generating additional cash. The company says it believes the timing of any future profitability "depends to a significant degree on levers we control," referring mainly to the planning of new locations. Fewer expensive new locations, the theory goes, would lead to fewer expenditures. Which seems fair enough. But this concept also seems to be at odds with WeWork's statements elsewhere in the filing that it plans to continue its rapid expansion.

3. Perhaps the most relevant statement on the matter from the IPO filing is this: "We have a history of losses and, especially if we continue to grow at an accelerated rate, we may be unable to achieve profitability at a company level (as determined in accordance with GAAP) for the foreseeable future."

4. It was difficult to ignore that the filing dropped during a week when the US stock markets experienced their biggest dip of 2019 and signs of a coming recession continued to mount. It's long been posited that WeWork's real estate-heavy business model could encounter stress if the economy turns south. Is it a hypothesis that's about to be tested?

5. The first two sentences of the filing really set the tone: "We are a community company committed to maximum global impact. Our mission is to elevate the world's consciousness." That's one way to describe a business that rents out office space, I suppose. I don't know how much it does to justify WeWork's on-paper valuation of US$47 billion.

6. Speaking of which, here's a list of companies that closed the week with market caps of less than $47 billion: Target, Tesla, Ford, FedEx, Delta Air Lines, Marathon Petroleum, Humana, Dollar General, eBay, Allstate, Thomson Reuters and General Mills. These aren't apples-to-apples comparisons, but again: WeWork posted a loss last year of nearly US$2 billion.

7. The business often cited as WeWork's closest analog on the public market is IWG, a European co-working space company that has more locations than WeWork and currently turns a profit. Its market cap at Friday's close: a bit shy of $4 billion.

8. I've got to get to Adam Neumann, I suppose. The filing certainly did: As Bloomberg noted, the name Adam appears 169 times across the whole of the prospectus. The most eyebrow-raising occurrence, in my opinion, came when WeWork revealed that, as part of its rebrand to "The We Company" earlier this year, it paid US$5.9 million to acquire the trademark related to the We name. The previous owner of those trademarks? None other than Neumann. The filing also confirms earlier reports that Neumann has leased buildings he owns back to WeWork, another unusual arrangement.

9. WeWork will go public with a three-class share structure that will concentrate a large amount of power in Neumann's hands. It only adds to the quasi-messianic role that Neumann seems to play at the business. In its prospectus, WeWork says that its "future success depends in large part on the continued service of Adam Neumann," shortly before noting that the company has "no employment agreement in place with Adam, and there can be no assurance that Adam will continue to work for us or serve our interests in any capacity." Well alright then.

10. Another random note: If Neumann doesn't donate US$1 billion to charity in the next 10 years, his extensive voting rights will be cut in half.

I could keep going, but it's probably time to wrap this up. I didn't even get to the $10.7 billion SoftBank has pumped into WeWork over the past three years, or various other Neumann-related self-dealings and conflicts of interest. If you're the sort of person who enjoys perusing financial documents (and you're reading this newsletter, aren't you?), I'd really suggest giving the whole thing a read.

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