- WeWork is one of the latest businesses to “jump on the SPAC bandwagon”.
- This announcement offers interesting insights both about WeWork and special purpose acquisition companies.
- Jonathan Price explains how SPACs work and what it means for WeWork.
I hope you will forgive me for yet another piece about WeWork, it’s just that in an industry where excitement and entertainment are rare (except at the Alliance Business Center Network parties of yore – how I miss those) WeWork never ceases to stand out. The reason for this article is the announcement made on March 26, that the company would go public via a merger with BowX, a publicly listed special purpose acquisition company or SPAC, becoming one of the latest businesses to jump on the SPAC bandwagon.
This announcement is interesting for two reasons, first because of what it says about WeWork and second because of what it says about SPACs. I will consider both aspects in turn, but before doing so let me summarise what is happening here for those unfamiliar with SPACs.
A SPAC is a cash shell company, that is to say a company which has cash, but no business. This situation generally occurs in one of two ways: either the company had a business and sold it for cash, or it never had a business in the first place, but is a new company launched by a well-known manager or investor to which shareholders have entrusted their money in the hope that something good can be found to invest in. Once the manager has found a business to buy, the two companies are merged together and the SPAC shareholders become shareholders in the target company, in this case, WeWork – a process inelegantly known as ‘de-SPACing’.
One of the key questions about WeWork is, how much is it worth?
At the time of the last investment agreed by Softbank in 2019 WeWork was valued at $47 billion. In the run-up to the failed IPO in that year, Goldman Sachs, one of the three investment banks on the short list for ‘bookrunner’ of the IPO was reported as valuing the company as high as $96 billion, though one assumes this was for the purpose of winning the IPO mandate and the bank would have ‘walked back’ from that figure once the deal was in the bag.
In the announcement of the merger with BowX, WeWork, now shorn of its visionary Israeli founder, Adam Neumann, was valued at a mere $9 billion, less than one tenth of its peak valuation. In case that seems like a bargain basement price, it would be well to remember that the much larger, long established and profitable competitor, IWG plc is only valued at $5 billion.
BowX was set up by Vivek Ranadivé, founder of the California-based software group Tibco, raising $483 million in cash when it was floated. This cash, or what’s left of it after expenses, will be available to WeWork together with $800 million which it is thought can be raised from institutional investors, such as Starwood Capital, Fidelity and BlackRock. What WeWork will use the capital for is unclear, though considering it lost $3.2 bn last year, it may just be ‘keep the lights on’ money.
Is WeWork worth this sort of money?
It depends on the view you take of the future. The Financial Times put it like this in its report of the March 26 announcement:
“WeWork expects its revenue to increase by almost $4bn by 2024, according to its investor presentation. Executives at the company project adjusted earnings before interest, taxes, depreciation and amortisation margin — a measure of WeWork’s profit as a percentage of its revenue — will swing from negative 55 per cent in 2020 to almost 30 per cent in 2024.
WeWork is betting on higher occupancy to deliver these projections despite a 47 per cent drop in occupancy rate across its global portfolio in 2020 due to the pandemic. The company, which is pitching itself as a “technology platform” rather than a conventional bricks and mortar landlord, said it needed 70 per cent physical occupancy to break even.”
We all hope that 2021-2024 will be better for business than 2020, but an 85 percentage point swing in EBITDA from -55% to +30% is a big ask for any business, even spread over four years.
The statement that breakeven is at around 70% occupancy is not surprising. More questionable is the positioning of WeWork as a technology platform, rather than a space and services company. We have yet to see any technology emanating from WeWork that would justify that categorisation.
Despite these lingering doubts, the investors in BowX obviously considered the announcement to be a positive one, as the shares rose 5% in response, though a cynic might think this was an expression of relief that the managers of the SPAC had at least found something to buy, unlike many of the other SPACs floated in the last 12 months.
Cash shells have been around for a very long time and so have speculative companies launched by famous promoters. At the height of the South Sea Bubble in 1720, “a company for carrying on an undertaking of great advantage but nobody to know what it is” was formed in London. At that time, as now, there was a great craze or mania for investment and the number of new companies incorporated rose sharply, before collapsing again as the bubble burst.
Since mid 2020 the amount of money subscribed into SPACs has risen from less than $2 billion per month to over $25 billion in January 2021, and by mid March 2021, Reuters was reporting that SPACs had already raised in two and a half months in 2021 more than the entire 2020 total of $83.4 billion.
With so much cash raised in such a short time, it is not surprising that a record number of SPACs are looking for firms to merge with, and when lots of buyers are looking for sellers, the price tends to go up.
SPAC promoters are also under pressure to get deals done quickly because if they don’t manage to do a merger within two years of raising the capital for the SPAC, the money has to be returned to investors. This is a double blow to the promoters because not only have they wasted two years, but they also lose out on the substantial number of free shares that they get for putting the SPAC together. As a result, sponsors/promoters of SPACs are incentivised to get a deal done, any deal, within the two-year period.
As a number of commentators have noted, the SPAC bubble seems to be deflating with a number of ‘copycat’ companies coming to the public market as a result of mergers with SPACs. Another straw in the wind is the increase in short positions in SPAC shares held by hedge funds. The regulatory authority has also weighed in on SPACs, pointing out that one aspect of the process that is widely believed to offer legal advantages as compared to the normal IPO process, might not actually do so.
All in all, WeWork had better get its skates on, if it doesn’t want its failed IPO to be followed by a failed de-SPAC.