How to spot the peak of a market bubble? WeWork’s planned IPO might just give you the template – a flawed business model with assets and liabilities totally out of whack, an up-in-the-air valuation, outright corporate governance misdemeanours, related party transactions, creative accounting in all its glory, a self-aggrandizing founder and here’s the best part – to call it the peak of the tech bubble, it is not even a tech company. The IPO prospectus that came out earlier this week has stunned analysts and investors alike for the bold disclosures. Whilst you can indulge yourself with several scathing and some hilariously so pieces on the subject, Chris Bryant at Bloomberg sums it up crisply for us.
Accounting and Governance Shenanigans
“The “hip” office space provider makes huge losses but its individual locations are somehow deemed profitable thanks to flattering accounting adjustments. While there was no mention this time of the company’s “community-adjusted Ebitda,” a much-maligned metric that boosted its profit shamelessly, it came up with an equally problematic “contribution margin” even though that positive figure excludes some hefty corporate operating expenses.
…Neumann’s grip on the company is equally troubling as he’ll still control most of the voting rights after the listing. That gives him the power to remove directors and executives who displease him and, of course, to dictate strategy. It’s an unequal relationship too. Despite his apparent importance he doesn’t have an employment contract, meaning he could leave at any time in theory.
…Various eye-opening “related-party” transactions (in this case, WeWork taking out leases on buildings owned by Neumann) are declared, as my colleague Shira Ovide points out. Meanwhile, three of the banks underwriting the IPO have extended Neumann a $500 million credit line secured against his shares. If he were ever unable to satisfy a margin call, the lenders could seize and sell stock, the prospectus notes, putting downward pressure on the share price. In other words, the interests of Neumann and other investors aren’t necessarily aligned.”
Business model and Valuation
“Just because Masayoshi Son’s SoftBank entities and other backers believe this company is worth at least $47 billion (or perhaps twice that if the targets of a recent stock incentive plan are any guide) doesn’t just make it so. The reality is that that WeWork operates in a cyclical sector with few barriers to new competitors, and it remains both a corporate governance nightmare and a cash bonfire. Its main listed rival, the U.K.’s IWG Plc, is capitalized at just 3.75 billion pounds ($4.4 billion). And that’s despite it generating more revenue than WeWork and making a profit.
…But how can one put a value on the shares anyway? The company doesn’t plan on paying dividends, which is hardly surprising in view of the $2.5 billion of cash it burned through in the first six months of this year. And you can’t easily apply a multiple of earnings to estimate its value because WeWork doesn’t have any of those either – and won’t do for the foreseeable future.
Net losses, which totaled $1.6 billion in 2018, “may increase as a percentage of revenue in the near term and will continue to grow on an absolute basis,” the company said, ominously.
This all matters because WeWork has a growing pile of debt and $47 billion of mostly long-term lease obligations. Unlike a WeWork membership, those leases can’t be cancelled easily. Revenue that’s been committed covers less than one-tenth of that total lease obligation“
“…Meanwhile, WeWork’s description of Adam Neumann, its co-founder and chief executive, stops short of claiming he can walk on water, but only just: “Adam is a unique leader who has proven he can simultaneously wear the hats of visionary, operator and innovator, while thriving as a community and culture creator,” it says. That’s a lot of headgear.”
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