SoftBank Group has officially pulled out of its deal to buy $3 billion worth of shares in WeWork from stockholders. The Japanese conglomerate said it had “no choice” but to scrap the agreement because the co-working giant had failed to meet several conditions by April 1, including not getting antitrust approvals or closing joint ventures in Asia. Multiple, new, and significant pending criminal and civil investigations were also major factors. This development won’t affect the $5 billion lifeline SoftBank agreed to give WeWork directly.
- Adam Neumann got what he deserved: The deal would have mostly benefited Neumann, who was lined up to sell $970 million worth of shares.
- On the business side: WeWork’s new Chief Executive Officer Sandeep Mathrani has been contacting its largest landlords and asking to help it cut its rent bill by up to 30%, Bloomberg reported. Mathrani is seeking to achieve this by offering solutions including revenue-sharing agreements.
- Where this is headed: The majority of WeWork’s leases are held by special purpose vehicles that would enable the company to renege on paying rents at individual locations without risk to the parent company. If the co-working giant chooses this course, it will obviously hinder WeWork’s ability to lease new space in the future.
- Staggering lease liabilities: As of June 30, WeWork was on the hook for at least $47 billion in lease liabilities accrued during its years of venture-backed breakneck expansion. Now, it faces a potential cash crunch as the outbreak of Covid-19 puts pressure on the company to close some locations. WeWork had provided landlords with credit support in respect of leases in the form of corporate guarantees of $4.5 billion… The company had $4.4 billion in cash as of Dec. 31.
- WeWork’s tenants are getting out: The company is on average locked in to 15 year leases, while its tenants have the option to sign on for monthly commitments (28% choose such an arrangement). The rest of the leases are one-year deals. WeWork is unsuccessfully offering tenants discounts to minimize cancellations.
- Credit the foresight: Eric Rosengren, the president of the Boston Federal Reserve bank, warned in September that the business model of co-working companies could make the next recession worse by sparking a run on commercial property, the Guardian noted.
- Truth is that SoftBank should bail completely: With WeWork bonds trading at around 36 cents on the dollar and the global economy in upheaval over the coronavirus pandemic, there’s no price in the world that could have made SoftBank’s double-down on the shares look smart. Pouring $5 billion into WeWork debt would be a poor use of its funds.