The whole WeWork saga just keeps getting stranger and uglier, especially for SoftBank, Vision Fund, SoftBank’s $100 billion subsidiary investment vehicle, and Masayoshi “Masa” Son, founder, chairman and CEO of SoftBank and CEO of the Vision Fund.
SoftBank just took control of the floundering WeWork this morning with an almost $5 billion rescue package after the company’s board sought out 75 financing sources in a week, but in the end chose SoftBank’s deal over JPMorgan’s junk bond-based rescue plan.
Too bad for SoftBank, the Vision Fund, Masa Son, WeWork, its investors, and its employees, the rescue package is only a temporary lifeline.
WeWork will need a lot more cash in early 2020.
WeWork’s Running on Magical Thinking
The question everyone should be asking is how could WeWork which was valued at $47 billion in January 2019, and expected to go public later in the year, end up being rescued in a deal that values it at only $8 billion today?
If you think the answer maybe has something to do with a sleight of hand somewhere, you’re right.
To understand what happened to WeWork, in terms of the huge valuation drop that it suffered, you must understand how it got to that valuation in the first place.
There’s no real magic in what the WeWork company does, though its cult-like founder Adam Neumann and the company’s backers would have us believe that it’s a magic sharing economy business.
WeWork buys office buildings and leases commercial real estate, renovates them, and rents out office space on a kind-of shared economy basis, where individuals, start-ups, big and small companies, who essentially need temporary office space, sign short-term leases with WeWork.
According to WeWork’s S1 filing as part of its IPO, the company had $47 billion in long term leases and only $4 billion in short-term lease revenue coming in over the next few years.
That’s hardly a magical business.
Enter the Dragon: SoftBank and the Vision Fund
SoftBank, founded by Masa Son, is a giant telecom company with a portfolio of other businesses.
|According to Yahoo Finance: SoftBank Group Corp. provides telecommunication services in Japan and internationally. The company operates in six segments: SoftBank, Sprint, Yahoo Japan, Arm, SoftBank Vision Fund and Delta Fund, and Brightstar. The SoftBank segment offers mobile communications, broadband, and fixed-line communications services; and sells PC software, peripherals, and mobile device accessories. The Sprint segment provides mobile communications and fixed-line telecommunications services; sells and leases mobile devices; and sells accessories. The Yahoo Japan segment is involved in Internet advertising, e-commerce, and membership service activities. The Arm segment designs microprocessor intellectual property and related technology; sells software tools; and offers software services. The SoftBank Vision Fund and Delta Fund segment is involved in investment activities. The Brightstar segment distributes mobile devices. The company also owns professional baseball team, as well as manages and maintains baseball stadium and other sports facilities; generates, supplies, and sells electricity from renewable energy sources; operates IT information site; and operates software site, through which it conducts an online game business for mobile phones and PCs. In addition, it provides investment management and payment services; visual, audio, and data content distribution services; and solutions and services for online businesses. The company was formerly known as SoftBank Corp. and changed its name to SoftBank Group Corp. in July 2015. SoftBank Group Corp. was founded in 1981 and is headquartered in Tokyo, Japan.|
SoftBank’s huge. It’s a publicly traded company (OTC: SFTBY) whose equity capitalization was over $100 billion last July; today, it’s less than $90 billion. The company’s also sitting on a mountain of debt to the tune of $46 billion.
Masa Son staked the Vision Fund, SoftBank’s slated $100 billion venture capital subsidiary launched in 2017 with $26 billion of equity from SoftBank.
Vision Fund got $45 billion from Saudi Arabia’s Public Investment Fund, $15 billion from Abu Dhabi’s Mubadala Investments sovereign wealth fund, and a collective $5 billion from Apple, Qualcomm, Foxconn, and Sharp.
But Vision Fund’s structure isn’t straightforward. While Softbank’s $26 billion is “equity,” everyone else’s contribution is a mix of equity and preferred securities that yields 7%.
Slightly more than 40% of the Fund is debt.
The Saudis put up $17 billion in equity and get 7% annually on their $28 billion in preferred securities (preferreds). Mubadala put up $5.7 billion in equity and gets 7% on their $9.3 billion in preferreds. The other group of investors put up about a third of their cumulative $5 billion in equity and two-thirds yields them 7% annually on their preferreds.
Even Softbank’s “equity” in the Vision Fund is suspect. Instead of cash, it put up equity in some of its portfolio businesses, including $11 billion in WeWork warrants. Another 25% of SoftBank’s “equity” came in as 25% of SoftBank’s stake in Arm Holdings, the U.K. chip designer that it bought in 2018 for $32 billion.
That’s a complex and unusual structure because Vision Fund must pay out dividends every year, no matter what happens with the investments in the portfolio. While SoftBank held back $15 billion to make some of those payments over the Fund’s 12-year life, the rest is supposed to come from taking some of the more than 80 portfolio companies public.
So far, that’s not working out so well.
Vision’s two big IPOs, Uber and Slack technologies, are down considerably from their IPO valuations. Uber’s IPO valuation was $84.2 billion, its equity is now valued by the market at $51.5 billion. Slack’s IPO valuation was $23 billion, it’s now $10.5 billion.
Those losses hit the Vision Fund hard, but are magically offset by other magic valuation mark-ups on other Vision Fund portfolio companies that are suspect, to say the least. I’ll get to that.
The Vision Fund, before this morning’s rescue, owned a third of WeWork, having put $10.65 billion into the company. The last $2 billion was injected in January at a per share price to Vision that rendered the total valuation of WeWork at the $47 billion level everyone was talking about.
That is until the S1 came out.
Black Magic Is Behind This Bailout
Investors balked at buying WeWork shares in an IPO at that valuation once they saw the company’s magical financials as more like black magic. And they hated that founder Adam Neuman and his wife Rebekah would retain almost total control over what would be a public company.
So, they bolted and the IPO was shelved.
WeWork expected to raise billions from the IPO and had lined up an almost $6 billion debt facility that would have used WeWork shares as collateral.
None of that happened, leaving the company gasping for cash.
JPMorgan Chase bankers wanted to sell junk bonds with an outrageous coupon to get WeWork the cash it needed.
And they were in the running, that is, until reality set in.
One analyst estimated the coupon on any bond offering by WeWork would have to be 15% to attract investors. With WeWork’s existing bonds already trading below 85 cents on the dollar, and JPMorgan unwilling to guarantee placement of the bonds, WeWork’s board opted for the SoftBank solution.
SoftBank is now putting up Softbank money, not Vision Fund money to save WeWork.
The deal pays Adam Neumann $1 billion for some of his stock and includes a $500 million line of credit for him to pay down loans that he got from JPMorgan and others and pays him a one-time $185 million consulting fee. For that, he’s out of the company, though he momentarily retains a board seat.
The rest of the more than $3 billion SoftBank is putting up and will go to buy shares from employees and other investors.
What that does to flush up WeWork with the cash that it needs is undetermined.
The truth is that it’s nothing compared to what WeWork needs: more cash, and a lot more next year.
The deal to buy stock changes WeWork’s valuation, because SoftBank’s paying a lot less for shares that it’s buying than for what it paid back in January that gave the company its fake $47 billion valuation.
WeWork’s new valuation is $8 billion based on the deal with SoftBank.
That’s crushing for Softbank and the Vision Fund considering together the Vision Fund and SoftBank are now into WeWork for more than $15 billion.
How did a magical valuation of $47 billion turn into a valuation of $8 in less than nine months?
It’s a function of the magic performed regularly by venture capital funds and Wall Street.
I’ll explain the trick on Friday.