The past six months has seen co-working office space giant WeWork stumble from one disaster to the next. It’s not long ago that the company was the most valuable privately owned firm in the USA. After gearing up for the IPO the company and its biggest investor Softbank would establish the company as the world’s biggest commercial real estate player and ‘disruptor’ of the office space market, things quickly took a turn for the worse.
First the IPO was aborted after investors mercilessly picked apart the company’s business model and corporate governance. Not without merit, it has to be said. Huge loans had been made to co-founder and CEO Adam Neumann against his equity. Those loans were used by Mr Neumann to acquire commercial properties he then leased back to his own company on long term agreements.
And the fear was always what would happen to cashflow during an economic downturn that reduced income for WeWork but didn’t change long term agreements with property owners. Just how big a problem that could be is already a reality – and a much starker one than even the most sceptical investors would have anticipated a few short months ago.
But despite all that, SoftBank was still the company’s biggest investor and letting the company run out of cash would have seen it crystalise a huge loss on its earlier multi-billion investments. SoftBank has already ploughed over $14 billion into the company.
A $3 billion share tender was agreed last year, on the condition Mr Neumann stepped down from an active role on the board and day-to-day management. He would, however, be rewarded handsomely for departing quietly without causing too much of a scene. As would other early investors. And SoftBank would take over almost complete ownership of WeWork.
However, SoftBank, itself under serious pressure after the heavily indebted operation’s share price slumped in recent weeks and an assault by an activist investor, has now pulled out of the deal. The investor released a statement today that read:
“Given our fiduciary duty to our shareholders, it would be irresponsible of SoftBank to ignore the fact that the conditions were not satisfied and to nevertheless consummate the tender offer.”
Mr Neumann, who would have been able to sell around $1 billion of his own WeWork stock as part of the aborted deal was reportedly informed on Wednesday that it would no longer be happening. The withdrawal is now expected to spark a legal battle with Neumann and Benchmark Capital, a major early investor, expected to sue. SoftBank will be confident of winning any courtroom drama, having brought in expert legal advice over the past few weeks as it approached a final decision.
A special WeWork board committee chaired by Bruce Dunlevie and Lew Frankfort of Benchmark Capital had already last month responded to the threat of the deal being reneged upon as “inappropriate and dishonest”. On Wednesday the committee said it would evaluate all of its legal options.
WeWork and Benchmark declined to comment on the news, first reported by Bloomberg.
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