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Softbank's WeWork Bailout Offers Landlords Hope

Media outlets are reporting that The We Company agreed to a bailout of sorts from Softbank, The We Company’s largest backer. Details so far have been a bit light, but the terms released to date indicate that Softbank will acquire up to $3 billion in stock from existing WeWork employees and investors while extending the company a $5 billion loan and accelerating a $1.5 billion investment in the company. The proceeds from the deal are not likely a panacea, but it extends WeWork’s runway to undergo meaningful restructuring.

It may be easy to get lost in some of the emotional turbulence of the deal, given that Adam Neumann, WeWork’s Co-founder and former CEO, could emerge from the ordeal as a billionaire. But this may be Softbank’s penance for lacking sufficient oversight over one of its flagship investments. At TRA, we choose to look at this not from the sunk costs associated with prior decisions, but instead with a forward-looking lens. The deal will give WeWork much needed cash to provide severance for its soon to be laid off employees while giving the company an adequate capital cushion to cut costs and rebalance its operations with an eye toward profitability.

The deal also effectively mutes Mr. Neumann’s role in the company. The former CEO will remain as an advisor and observer, but he will no longer have significant voting influence on WeWork’s strategic direction. As we have stated in a previous post, this move cleans up part of the corporate governance challenges inherent in Mr. Neumann’s involvement in the business.

What Might We Expect from WeWork Now?

We believe that WeWork’s fevered growth and lofty goals are likely in the rearview mirror. Management will take a more sober (literally and figuratively) approach to operating the business. While it is early to speculate on what steps WeWork will take to become profitable, it seems likely the company will look inward with an eye toward consolidating operations around its core coworking business. It already announced plans to close WeGrow, the school ostensibly run by Mr. Neumann’s wife. It may also look to sell or shutter underperforming business lines like WeLive or Rise by We to shore up additional capital.

We expect WeWork’s coworking footprint to continue in some form as it has the greatest potential to generate stable cash flows. Despite the bailout, WeWork remains highly leveraged and will need sufficient cash flow to service its debt obligations. Existing WeWork landlords can at least breath a temporary sigh of relief on this news, as the deal provides enough capital to keep WeWork afloat for the short-term.


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