Softbank is reportedly preparing a financing package for Wework that would give it control over the cash-strapped shared office space company.
The package would significantly increase the stake of Softbank, which already owns around a third of Wework, a source familiar with the matter told Reuters. This would further dilute the influence of Wework co-founder Adam Neumann, who was forced out as chief executive last month.
It was reported last week that Wework was in negotiations with Softbank over a new $1bn (£795m) investment from the Japenese conglomerate in order to enable Wework to undertake a substantial restructuring process.
Wework is in dire need of an injection of capital, and risks running out of money as early as the end of December, the source told Reuters. Analysts have already raised concerns about Wework running out of cash.
The company faces a choice between two financial lifelines. Wework is also working with JP Morgan Chase to negotiate a $3bn debt deal after it scrapped a planned initial public offering (IPO) last month over investor concerns about its valuation and business model.
“WeWork has retained a major Wall Street financial institution to arrange a financing,” said a company spokesperson.
“Approximately 60 financing sources have signed confidentiality agreements and are meeting with the company’s management and its bankers over the course of this past week and this coming week,” they added.
Softbank declined to comment on the reports.
“Given the amount of money Softbank has put into WeWork, [the financing package] is probably the only way they can look at clawing back some of their investment. It seems they are taking the ‘in for a penny, in for a pound’ approach,” CMC Markets’ Michael Hewson told City A.M..
“They face an unpalatable choice of either letting the $10bn they have already invested go up in smoke or double down. It’s a high stakes gamble given the company’s current valuation, but is really the only real option open to WeWork if it is to survive into next year,” Hewson added.
Wework lost $1.9m in 2018, and burned through $2.36bn in the first half of 2019, according to company filings.The company has been downgraded by global ratings agencies Standard & Poor’s and Fitch in recent weeks, pushing its ratings deeper into junk territory.
The company had been valued at $47bn in January, when Softbank agreed to a further a $1.5bn investment in Wework, but it is estimated that Wework’s valuation estimates had fallen to as low as $10bn to $12bn by the time its IPO was scrapped.
Speaking at an event in London last week, an executive from Softbank’s Vision Fund suggested that companies such as Wework should wait until they can demonstrate suitable levels of cash flow before listing.
“There are some companies out there that are probably better to evolve in the private domain… to demonstrate the cash flows that investors want”, said Vision Fund’s Saleh Romeih. The $100bn fund has been one of Wework’s major backers.
Wework replaced co-founder Neumann with insiders Artie Minson and Sebastian Gunningham as joint chief executives after the ditching of the planned IPO.
The pair have spoken of the need to return to Wework’s core business of renting out trendy offices, which would pull the company away from the other activities such as education that Neumann had ventured into.
Main image credit: Wework