WeWork IPO – La La Land.

This time its SPAC.

• WeWork is once again having a crack at going public and while the valuation is 80% lower than it was last time around, the company is still pushing the widely debunked technology platform story.
• The reason it is pushing this story is because it is the only way that this company can differentiate itself from the likes of IWG is by painting itself as a technology company rather than a real estate company.
• IWG is a regular lessor of office space which currently trades at a market cap of $5bn with an enterprise value of $14.8bn (due to £7bn of long-term lease obligations) which posted revenues of $3.5bn in 2020 and where consensus expects it to grow to $3.7bn in 2021 on a very anaemic recovery.
• In 2019, extrapolating from the original S-1 (see here), WeWork probably did $3.5bn in revenues.
• Occupancy in 2020 went from 75% to 47% which leads me to estimate that revenues in 2020 for WeWork probably fell to $2.2bn and where the outlook for recovery is also pretty anaemic.
• However, on this $2.2bn in revenues, WeWork lost a massive $3.5bn compared to $489m lost by IWG on revenues of $3.5bn.
• Given the slowness of the recovery that is expected in this sector, losses for the next couple of years are likely to continue to be pretty large.
• IWG is expected to gradually return to profitability but I suspect that it will take far longer for WeWork to do the same.
• IWG is very heavily indebted with long-term lease obligations but WeWork’s H1 2019 shows very few, largely due to differences in which the way the deals were struck and how they were accounted for on the balance sheet.
• Some estimates of its lease liabilities back in 2019 ran as high as $50bn over the long term but I suspect that the pandemic has enabled WeWork to back out of a lot of them.
• Assuming that these have been reduced to $2bn or so this would leave WeWork trading at 2021 EV / revenues of 4.6x which is broadly in line with IWG at 4.3x 2021 revenues.
• However, the validity of this analysis is completely dependent on WeWork’s long-term lease liabilities for which, even the S-1 filed back in 2019 was very unclear.
• Hence, at $9bn, WeWork is fairly valued in the best possible case, but I think that the technology platform story is as suspect today as it was then.
• I have asked tenants, analysts and commentators on multiple occasions what the technology platform is and how it makes WeWork service, offering and profitability more effective but I have never gotten a straight answer leading me to suspect that it is not much more than vapourware.
• This may have changed in the last 18 months but given that the story seems to be exactly the same, I remain pretty sceptical.
• The company almost went bust in 2019 as the IPO collapsed taking the financial house of cards with it and the company had to be bailed out by Softbank.
• As is usual these days, the company is considering going public by SPAC which is a lot easier than a regular IPO and with the current craze, may enable $1bn to be raised with little more than a cursory inspection of the fundamentals.
• The valuation is much more reasonable this time but there needs to be very clear and transparent visibility on what the real long-term lease liabilities are both on and off the balance sheet.
• The SPAC vehicle that WeWork is speculated to merge with is called BowX which is currently still trading very close to its cash price meaning that there may not be that much enthusiasm for this transaction.
• There are far better places to invest.