WeWork rescue plan could backfire on SoftBank group

WeWork’s valuation keeps sliding. SoftBank Group Corp., its largest outside investor, is now targeting $8 billion through a rescue package it’s putting together, according to Bloomberg News. But Masayoshi Son ought to be careful. While the deal may set a floor under WeWork, it could also diminish his standing along with SoftBank and its $100 billion Vision Fund.
Mere months ago, WeWork was seeking an IPO at a $47 billion valuation, now withdrawn amid whispers that the real value should be closer to $15 billion. SoftBank’s new plan goes even further and represents an 83% haircut that means serious pain for The We Co., founder Adam Neumann, and other shareholders including venture-capital investors and employees.
If SoftBank pulls it off, the move would cement Son’s reputation as a feared dealmaker, one that earned him the nickname Big Stack Bully. That’s because SoftBank would be a huge beneficiary of such a massive down round while everyone else could be clear losers.
The Vision Fund paid top dollar when it built its stake of around 29% in the office rental startup. By buying more shares, at an $8 billion valuation, Son might get to increase his stake while lowering the average price at which he paid. That would boost any possible upside from a future IPO, even if it were to happen at a substantial discount to $47 billion.
While talks are fluid and terms could change, as Bloomberg noted, a likely result of such a rescue package is that existing shareholders might lose on all counts: Their stakes get diluted and the value of their investment gets slashed, yet they’re stuck with a much higher average price of acquisition. Shareholders who didn’t pay cash for their stakes, such as employees, wouldn’t suffer that third consequence, though they’re no less disadvantaged since they’ve effectively bartered cash salary for shares.
What would be more troubling than SoftBank making this offer is WeWork’s board actually accepting it.
Currently, they’re weighing up two options: the SoftBank equity deal and a debt package being put together by JPMorgan Chase & Co. Many board members will also be equity holders so anything that cuts their stake or valuation wouldn’t be welcome. Debt, on the other hand, transfers risk to bondholders.
Given WeWork’s current financial situation, though, debt investors have been growing increasingly skeptical of the company. SoftBank and Son need trust to raise a second $107 billion Vision Fund, get regulatory approval for the merger of its US telco Sprint Corp., and have continued access to the best deals in the startup world. Forcing a haircut of this scale on WeWork at its weakest moment, and at the expense of other stakeholders, won’t help build that kind of confidence.
—Bloomberg