WeWork Still Needs Cash After Officially Pulling IPO

SO how many other Unicorns are going to have to go this route and what will that mean for the markets generally?  ...Aivars Lode

For years, WeWork’s parent company was defined by big spending as it relentlessly pursued rapid growth. 

Now, in the aftermath of a botched initial public offering attempt and the ouster of co-founderand chief executive Adam Neumann, it is facing a different reality: It needs to stop bleeding cash. 

On Monday, We Co. said it would file a request to withdraw its initial public offering filing with the Securities and Exchange Commission. The company said it is postponing its IPO to focus on its core business and that it has “every intention to operate WeWork as a public company” but didn’t provide a time frame.

To cut costs, the new co-CEOs, Sebastian Gunningham and Artie Minson, are planning thousands of job cuts, putting extraneous businesses up for sale and purging some luxuries from the previous CEO, like the G650ER jet the company purchased for more than $60 million last year, people familiar with the matter have said. 

We Co. had $2.5 billion of cash as of June 30. At its current rate of cash burn—about $700 million a quarter—it would run out of money some time after the first quarter of 2020, according to Chris Lane, an analyst at Sanford C. Bernstein & Co. He and his colleagues projected in a recent note to clients that We would burn through nearly $10 billion in cash between 2019 and 2022, assuming it keeps growing.

Messrs. Gunningham and Minson said in a joint email to staff last week that they “anticipate difficult decisions ahead.” 

“As we look toward a future IPO, we will closely review all aspects of our company with the intention of strengthening our core business and improving our management and operations,” they wrote. 

Further adding pressure are agreements We made in a bond offering last year, for which it must keep at least $500 million of cash, according to S&P Global Ratings, which downgraded the company’s bonds last week. 

The company, which provides shared workspaces, had expected a huge infusion of cash in a public offering. But skepticism from prospective public market investors helped lead to the IPO being delayed and the subsequent replacement of Mr. Neumann with two of his former deputies, and now investors don’t foresee an IPO until next year. The company is in early talks to raise money from private investors, people familiar with those discussions have said.

We Co.’s new Co-CEO Artie Minson, shown in 2016, said the executives ‘will closely review all aspects of our company’ as it looks toward a future IPO. PHOTO: PATRICK T. FALLON/BLOOMBERG NEWS

The sudden desire to deploy cuts contrasts with the picture long painted by Mr. Neumann and other executives including Mr. Minson, who stressed that the company had plenty of cash and that losses were nothing to worry about. 

For years, the internal mantra was that WeWork’s large losses were the result of its rapid growth. Because so much of the money was going to new locations, if We stopped growing, it could be profitable, Mr. Neumann would tell staff. 

But the scale of its losses, even for a fast-growing co-working company, has perplexed rivals and others in the real estate space. Taken with the cuts, analysts say, it suggests problems extend beyond Mr. Neumann to the underlying health and strategy of the business.

“Something is wrong,” said Nori Gerardo Lietz, a lecturer on real estate and venture capital at Harvard Business School who recently published an analysis of the company. “They’re not managing their growth—they’re spending money like drunken sailors,” and their general and administrative costs are growing too fast, she said.

Ms. Lietz said the disclosures in We’s IPO prospectus don’t adequately explain the root problems behind the large losses, which totaled more than $1.6 billion in 2018.

A danger for We in cutting costs is that the moves would slow its growth rates. The company has doubled its revenue most every year—a quality it long hoped investors would focus on. With slower growth, investors say they would need to see a clear road to profitability. 

No matter the growth rate, the business is expected to need lots of cash to build out its offices. We reported spending $1.3 billion in net capital costs in 2018—only a portion of which shows up in the company’s official losses because those costs are accounted for over many years. 

Without more disclosure from We or its co-working rivals, many of which are private, it is difficult to make exact comparisons with other firms and their profitability. 

Still, history shows that some comparable companies were losing far less despite strong growth. In 1998 and 1999, competitor IWG PLC—then known as Regus—positioned itself as a breakout company remaking the office market with its short-term leases and services for tenants. But even with its revenue doubling in 1999, it lost £17.9 million, or 16% of revenue. 

In comparison, WE’s 2018 loss of $1.6 billion was on revenue of $1.8 billion.

The largest serviced-office company in the U.S. at the time, HQ Global Holdings, grew even faster between 1999 and 2000. Revenue more than doubled to $455 million, on which it posted losses of $20.5 million. Both IWG and HQ Global had a similar basic model, but also made money charging for add-ons like phones and printers. IWG acquired HQ Global in 2004. 

By Eliot Brown - Wall Street Journal