WEWORK'S valuation keeps sliding. SoftBank Group, its largest outside investor, is now targetting US$8 billion through a rescue package it's putting together, according to Bloomberg News. But Masayoshi Son ought to be careful. While the deal may set a floor under WeWork, it could also diminish his standing along with SoftBank and its US$100 billion Vision Fund.
Mere months ago, WeWork was seeking an IPO at a US$47 billion valuation, now withdrawn amid whispers that the real value should be closer to US$15 billion. SoftBank's new plan goes even further and represents an 83 per cent haircut that means serious pain for The We Co, founder Adam Neumann, and other shareholders including venture-capital investors and employees.
If SoftBank pulls it off, the move would cement Mr Son's reputation as a feared dealmaker, one that earned him the nickname Big Stack Bully. That's because SoftBank would be a huge beneficiary of such a massive down round while everyone else could be clear losers.
The Vision Fund(1) paid top dollar when it built its stake of around 29 per cent in the office rental startup. By buying more shares, at a US$8 billion valuation, Mr Son might get to increase his stake while lowering the average price at which he paid. That would boost any possible upside from a future IPO, even if it were to happen at a substantial discount to US$47 billion.
While talks are fluid and terms could change, as Bloomberg noted, a likely result of such a rescue package is that existing shareholders might lose on all counts: Their stakes get diluted and the value of their investment gets slashed, yet they're stuck with a much higher average price of acquisition.
Shareholders who didn't pay cash for their stakes, such as employees, wouldn't suffer that third consequence, though they're no less disadvantaged since they've effectively bartered cash salary for shares.
What would be more troubling than SoftBank making this offer is WeWork's board actually accepting it.
Currently, they're weighing up two options: the SoftBank equity deal and a debt package being put together by JPMorgan Chase. Many board members will also be equity holders - representing investors such as VCs - so anything that cuts their stake or valuation wouldn't be welcome. Debt, on the other hand, transfers risk to bondholders.
Given WeWork's current financial situation, though, debt investors have been growing increasingly sceptical of the company. Its 2025 US dollar bonds plunged over the past month, with the JPMorgan-led financing package reported to include debt with yields as wide as 15 per cent.
Taking the SoftBank package would likely indicate that JPMorgan couldn't put together an attractive enough deal for its consortium of about 100 investors to stomach.
It could be a pyrrhic victory for Mr Son, though. I recently argued that his reputation is more important than his stake in WeWork. The Vision Fund should be able to write down that investment to zero and still churn out attractive returns. But there are signs that the halo surrounding Mr Son and SoftBank is starting to fade.
Japan's Finance Ministry plans to close a tax-avoidance loophole that SoftBank used to its advantage, Nikkei reported on Sunday. The company paid no tax in Japan last year thanks to a series of complex paper transactions that booked losses by shifting assets within the group, according to the newspaper. In other words, a good portion of SoftBank's returns last year came not from savvy investing but merely from exploiting tax laws.
That sort of thing feeds into an increasing distrust by regulators and the public for tech companies and their billionaire bosses who dodge taxes, no matter how legally. SoftBank and Mr Son need trust to raise a second US$107 billion Vision Fund, get regulatory approval for the merger of its US telco Sprint, and have continued access to the best deals in the startup world.
Forcing a haircut of this scale on WeWork at its weakest moment, and at the expense of other stakeholders, won't help build that kind of confidence. BLOOMBERG
- Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.