Flexible Office Provider Touted as 'Opportunity Stock for the Recovery'
By Andria Cheng and Mark Heschmeyer CoStar News March 28, 2021 | 6:59 P.M. After a failed initial public offering attempt in 2019, WeWork, the global flexible space player, is becoming a publicly listed company after all following a merger with special-purpose acquisition company BowX Acquisition Corp.
Even though the deal values WeWork at an initial enterprise value of about $9 billion, sharply lower than its 2019 valuation of $47 billion, the SoftBank-backed firm sees a big growth opportunity in the multitrillion-dollar office market. The merger would provide WeWork with about $1.3 billion in cash.
Technically, WeWork will be acquired by BowX, but BowX has agreed to rename itself “WeWork Inc.” once the transaction is done, likely in the third quarter.
Here are 10 takeaways from the deal:
1. “Rocket ships”: Vivek Ranadivé, chairman and co-CEO of BowX, said on CNBC on Friday that he started the SPAC just a few months ago with the intention to fuel the next crop of growth companies, or what he described as “rocket ships.” “WeWork is the market leader in flex space,” said Ranadivé, a tech veteran who is also co-owner of the NBA’s Sacramento Kings. “It has an incredible moat built around the business. COVID was actually a tailwind for flex space. If Zoom was the opportunity stock for the COVID era, we believe that WeWork is going to be the opportunity stock for the recovery.”
2. Moving fast: It turned out WeWork’s second shot at becoming a public company took place in just a few months’ time. WeWork CEO Sandeep Mathrani said on CNBC that BowX made the first move to reach out to WeWork in December. “Sometimes you don’t pick the path, the path picks you,” Mathrani said. “We thought it’s a good time to raise additional liquidity to de-risk the balance sheet.” Mathrani will remain CEO of the combined company.
3. Boom time for SPACs: The timing of the deal comes at the peak of fundraising for SPACs, or so-called “blank-check” companies. SPACs continued to shatter records in the first quarter as 296 entities raised $87 billion, more than either SPACs or traditional IPOs during all of last year, according to IPO tracking firm Renaissance Capital.
4. A who’s who list of investors: Other parties involved in the transaction include Insight Partners, Starwood Capital, Fidelity Management & Research and BlackRock, showcasing investors’ bet WeWork will gain share from the growing flexible office market.
5. Plenty of targets for acquisition: Before coming to terms for a merger with WeWork, Ranadivé said during an investor presentation Friday that he started with a target database of 2,500 firms. BowX had extensive discussions and meetings with about 150 of those before creating a shortlist of 10, he said. And from that came the announcement of a combination with WeWork.
6. WeWork’s customers are small — and big: A list of many corporate giants — from Amazon and Walmart to Netflix and Airbnb to Goldman Sachs and Johnson & Johnson — rank among WeWork’s global customers, WeWork said in the investor presentation. The company closed 2020 with 450,000-plus memberships, with more than 50% of them “enterprise” customers, or companies with at least 500 employees. WeWork said its customer base going forward will be primarily those big clients, with a mix of small and medium-sized businesses. Enterprise customers made up just 10% of its business back in 2015.
7. BowX wasn’t the only SPAC eyeing WeWork: WeWork said the flood of capital for mergers and acquisitions brought interest from a variety of investors to its door. “WeWork received several inbounds from SPACs seeking merger partners or private investments,” the company said, adding it chose BowX because it understands WeWork’s “unique position, is aligned with its plans for continued growth, and has the experience and expertise to support the company on that trajectory.” WeWork said it also favors the fact BowX’s management team is made up of “tech entrepreneurs” schooled in building platform businesses. They “will be invaluable as WeWork continues its tech-driven disruption of office real estate,” the company said.
Ranadivé, for one, was the founder of software companies including TIBCO.
8. Swinging to profit by next year: WeWork forecast in the investor presentation its occupancy level to increase each year and return to 85% by 2024. The rate declined to 46% in 2020 from 72% a year earlier. The company said it also expects revenue to more than double to $7 billion in 2024 from $3.2 billion in 2020. The money-losing company expects its adjusted bottom line to break even in the fourth quarter this year, when its occupancy is projected to rise to 70%. WeWork expects its adjusted profit margin rate will turn positive next year.
9. Getting costs in order: Part of WeWork’s bid to turn to profit also includes reducing expenses. It cut more than two-thirds of its headcount last year from its peak in September 2019 as the company lowered “functional expense” by $1.1 billion. The company said it saved over $200 million by exiting or amending lease terms. It’s also exited noncore businesses including Meetup and restaurant coworking concept Spacious. Mathrani said the company expects to sell its WeLive business this month.
10. Smaller in size: Since coming on board in February 2020, Mathrani has overseen the whittling down of WeWork’s size. As of December, WeWork exited 106 pre-open or underperforming locations and amended over 100 leases in moves that it said will cut $4 billion in future lease payments. It ended 2020 with more than 850 locations in over 150 cities, with workstations totaling more than 1 million.
“We’ve been able to streamline our portfolio by giving back locations that were either obsolete in oversupply or in places that we would never make money,” Mathrani said.