Wework Saga: Revised Prediction

Learn what our latest predictions are for Wework's future.

In our most recent coverage of Wework entitled ‘We Predict a 63% Probability that Wework will go to a PE Firm!’ - we predicted that Private Equity buyout would be the preferred course for the company major stakeholders like SoftBank. Before that, we wrote another post entitled; ‘Friday Digest: Is the endgame near for SoftBank & Wework?’ where we predicted 2020 would be a crunch year for Wework.

Anyway, over the past few days, reports in the press from sources such as Axios suggest that SoftBank may be pulling out of a $3Bn commitment it made last year to buy Wework shares.

SoftBank yesterday threatened to pull the plug on its $3 billion tender offer for shares of WeWork, which was agreed to last fall and scheduled to close on April 1.

What’s happening: The formal message sent to investors is that SoftBank believes several deal conditions may not be satisfied, including the closing of a recapitalization of its Chinese joint venture, anti-trust approvals, and the emergence of a governmental investigation into company finances.

  • The informal message is that SoftBank wants to renegotiate, as a global recession looms and WeWork's "co-working" product appears antithetical to social distancing.

Details: WeWork closed just last month on a $1.75 billion credit facility tied to SoftBank's rescue package, and that money is not affected by the new development. Also not affected is SoftBank's nearly $200 million payment to former CEO Adam Neumann, in exchange for his board voting rights.

  • WeWork has not closed its co-working sites, even in San Francisco where a shelter-in-place order is in effect. It has, however, ramped up "deep-cleaning" efforts and asked its own corporate employees to work from home, if possible.

SoftBank's tender offer was to all WeWork shareholders, including Neumann, venture capital funds, and employees.

  • Participants could tender up to one-third of their stock at $20 per share.

  • Were Neumann to take full advantage of the offer, he'd net around $970 million.

  • While all vested employees are technically eligible, many later hires came in with strike prices above $20. In other words, it's mostly of value to earlier employees.

Between the lines: SoftBank isn't letting a crisis go to waste, and certainly has fiduciary obligations to its limited partners. And it isn't the only later-stage investor currently seeking to renegotiate existing deal terms.

  • But, but, but: This move is absolutely screwing over those early employees. These are people who may have made financial decisions over the past five months based on SoftBank's signature — and who now risk having the rug pulled out from under them.

Plus, it's also worth remembering, in terms of the government investigations:

  • We have no indication that investigators have actually found any wrongdoing, or if they're just kicking procedural tires in the wake of massive value destruction.

  • SoftBank was no passive player were there actual wrongdoing. It was a very large shareholder, had two board seats, and was very involved with the IPO process. Axios

What is the revised prediction?

Signals captured by Kähler VC.X strongly indicate that the following three options are now most likely:

  1. Real Estate Private Equity (we compute a 50% probability) - with this option, a deep-pocketed real-estate PE fund (e.g. Blackstone Group) buys a majority stake from SoftBank.

  2. Wework Collapse (we compute a 44% probability) - with this option, SoftBank will simply pull the life support plug, something that would’ve been unthinkable before COVID-19. However, with remote work becoming a norm, it’ll be hard for SoftBank to justify subsidizing high rents for an undetermined period of time.

  3. Adam Neumann returns (we compute a 6% probability) – with this option, Adam Neumann backed by deep-pocketed investors, buys a majority stake from SoftBank and takes back control. Will Adam Neumman reinvent himself into Adam Neumman 2.0 and as a result Wework 2.0? If so, what will Wework 2.0 become?

    The bottom line is, even with support packages being offered by governments around the world to mitigate the adverse effects of COVID-19, the current downturn provides SoftBank with a window to get out or at least an opportunity to massively reduce its Wework stake.

Why should other investors care?

Well, firstly, other investors may have a sizable number of portfolios using Wework co-working spaces. If Wework collapses, these will suddenly find themselves in the middle of a logistic nightmare. Likewise, if Wework is sold to a PE firm, the terms are likely to be less flexible than current terms. Hence, investors may want to help their portfolios with a Wework mitigation plan before its too late!

Secondly, this could be a nail in the coffin for all the recent hype and high valuations around companies masquerading as pure-play “tech companies”.

Finally, Wework and other companies in similar situations have a lot of bright people working for them - engineers, marketers, recruiters, etc. Some of these hardworking individuals will be looking for new opportunities at VC backed companies, others could potentially be the founders of the next big thing. Hence, investors may want to follow their progress as they move on. We’re currently tracking US and European based engineers working at big tech companies and notable VC backed unicorns including Wework via Kahler VC.X Deal Sourcing Signals

Disclaimer: Any opinions, newsletters, research, analyses, prices, projections or other information offered by Kähler AI is provided as general market commentary, and does not constitute investment advice. Kähler AI will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.  ZAIKU GROUP LTD.