Was Softbank’s Acquisition of WeWork a Shrewd or Sucker Move?

Wire

The We Company has received a lot of press coverage in recent months after a failed IPO shocked many in business and financial markets. Last week’s announced acquisition of The We Company by SoftBank prompts the question, “Is SoftBank shrewd or a sucker?”

SoftBank Group, headquartered in Tokyo, operates 6 business segments: telecommunications in Japan, Sprint, Yahoo Japan, distribution of mobile devices including PC software, peripherals, and mobile device accessories in Japan, Arm Ltd which engages in the design of microprocessor IP, related technology and sale of software tools, and SoftBank Vision Fund and Delta Fund. SoftBank Group generated $89.6 billion in revenues for the 12 months ending June 2019 with enviable EBITDA margins of 27.8% and Net Income Margins of 23%.

The We Company integrates space community services and technology in approximately 528 locations in 111 cities across 29 countries. The company’s platform provides members with flexible access to spaces that are powered by a culture of inclusivity, the energy of a global and diverse community, and the connectivity of a broad technology infrastructure. Through June 2019, The We Company generated $2.6 billion but posted a negative EBITDA of $1.9 billion and a Net Income loss of $1.67 billion.

SoftBank’s has offered to acquire an additional 71% stake in The We Company from founder Adam Newmann for an Implied Enterprise Value of $27.25 billion, which is a total consideration to shareholders of $3 billion. The Implied Enterprise Value to trailing 12 months Revenue is 10.5x! That is a rich multiple for a company that is in the condition WeWork currently is in.

The tender offer will be made at a price of $19.19 per share and is expected to commence in the fourth quarter of 2019. Adam Newmann owns approximately a 20% stake in the company and is expected to retain a stake after closing the transaction. SoftBank Group’s fully diluted economic ownership of The We Company will be approximately 80%. The We Company will not be a subsidiary of SoftBank Group but rather an associate company. SoftBank will not hold a majority of voting rights.

In a related transaction, SoftBank signed an agreement under which they committed $5 billion in new financing and accelerated an existing commitment to find $1.5 billion. Adam Newmann will become a board observer. The $27.25 billion Enterprise Value is a result of $23 billion in Net Debt. In July of 2018, the company had a post-money valuation of $42.4 billion, drastically inflated from the current proposed value of the pending SoftBank acquisition.

Is this a smart move or a train wreck? With over $8.7 billion raised today’s date, an IPO exit with a lofty valuation was just the ticket for the multitude of WeWork’s angel and venture investors to get their high ROI. Now that won’t happen as SoftBank is simply keeping WeWork alive for now.

WeWork has a culture problem and culture problems are hard to overcome with acquisitions. Stack on top of that fact that SoftBank is acquiring WeWork in a diversification M&A strategy, as its’ Chairman & CEO, Masayoshi Son, has been determined to build an investment conglomerate. With this type of M&A, cultural integration is tricky. Marcelo Claure, COO of SoftBank is assuming the position of The We Company’s Executive Chairman to the Board of Directors. Additionally, in removing Adam Newmann as CEO but keeping him as a board observer, I wonder if these moves are bold enough to resolve the cultural chaos within WeWork, the massive debt load the company is carrying, along with 9 years of cumulative losses. I believe that the WeWork business model will survive but SoftBank may end up having to divest this asset at a steep loss. Right now, I see this more likely a train wreck than a shrewd move.

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