WeWork needs an Adam Neumann, not the Adam Neumann

Vornado Realty Trust

06/02/2024 19:07

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
    By Robert Cyran
       NEW YORK, Feb 6 (Reuters Breakingviews) - Adam Neumann
knows three things. He knows how to encourage investors to value
a company at a ridiculous price. He knows how to get himself
paid. He also, having founded the now-bankrupt WeWork, knows
something about office real estate. Neumann wants his new
investment firm to buy his former brainchild out of
restructuring and is irritated WeWork’s new managers aren’t
giving him a chance, according to a letter published by the New
York Times on Tuesday. WeWork’s new guard could perhaps use a
believer like Neumann. It just can’t be Neumann. 
    The company, once valued at $47 billion, is a prime example
of how low interest rate-fueled exuberance got carried away.
Neumann tapped funders including SoftBank Group  9984.T  who, in
the late 2010s, were competing for high growth and huge returns.
He convinced investors to pump up WeWork’s value just before the
office market seized up. As the company’s cash burn couldn’t
keep up with its debt payments, disturbing stories emerged.
Among other things, Neumann owned stakes in buildings leased by
WeWork. The company agreed to part ways but paid him a very
large sum for the privilege.
    WeWork filed for Chapter 11 in November. In his letter,
Neumann says advances to WeWork have not been welcomed. He even
invoked hedge fund kingpin Dan Loeb’s name, saying that he is
partnering with reputable firms. Loeb’s fund, for its part, may
not be as interested as the letter claims, according to Reuters.
    There’s a case for investing in a company like WeWork at the
right price. Commercial real estate valuations have crashed –
shares of Vornado Realty Trust  VNO.N , one of the largest U.S.
office owners, are down almost two-thirds in five years –
suggesting firms like WeWork might be cheap. Landlords are
willing to sign long-term leases at lower prices to get people
through the door. Companies prefer to pay up for short-term
flexibility. WeWork sublets for a spread between the two,
creating a sweet spot. Indeed IWG  IWG.L , the Swiss-based rival
of WeWork, is expected to post record revenue this year thanks
to “structural growth.”
    Yet WeWork’s heady days are an overhang. Lenders agreed to
convert roughly $3 billion of secured debt into equity. However,
it still had over $13 billion of long-term leases. Without a
massive renegotiation, it’s hard to see how any buyer could make
everyone whole. Assume WeWork’s revenue this year is $3.4
billion, roughly its pace prior to bankruptcy. On IWG’s
multiple, at 0.7 times revenue, it would be worth about $2.5
billion. 
    WeWork needs someone who is willing to capitalize the
business at a valuation that is far too high. Unfortunately
Neumann has burned outside investors once. It can’t be built
back up from the ground with him. 
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    CONTEXT NEWS 
    Adam Neumann’s new real estate company, Flow Global, has
sought to buy WeWork or its assets, or provide
debtor-in-possession financing for the company which is in
bankruptcy, according to a letter published by the New York
Times. Neumann founded the workspace sharing firm, but left the
company in 2019.
    Neumann’s lawyers sent a letter to WeWork, saying Third
Point, the hedge fund run by Daniel Loeb, would help finance a
transaction. Third Point said it only held preliminary talks
with Neumann and his company, according to Reuters.
    WeWork filed for Chapter 11 bankruptcy protection in a New
Jersey court on Nov. 6, four years after it was valued at $47
billion in a funding round. It said about 92% of its lenders
agreed to convert their secured debt into equity, wiping out
about $3 billion of debt. WeWork has more than $13 billion of
long-term leases and has asked to renegotiate them in
bankruptcy. As of June, it had offices in 777 locations
worldwide.

 (Editing by Lauren Silva Laughlin and Sharon Lam)
 ((For previous columns by the author, Reuters customers can
click on  CYRAN/ 
robert.cyran@thomsonreuters.com; Reuters Messaging:
robert.cyran.thomsonreuters.com@reuters.net))