Wolf Richter wolfstreet.com, www.amazon.com/author/wolfrichter
House cleaners come in, halt all new leases, dump side businesses, sell corporate jet, lay off thousands, purge “Adam’s posse” – in just two days.
WeWork is fighting for survival. It’s burning through so much cash that it needs billions of dollars pronto. The collapsed IPO dream has cut off the money pipeline from retail investors. S&P now downgraded the company to B-, deep junk, citing the “heightened uncertainty” about its “ability to raise capital to support aggressive growth and the pressure this places on liquidity.” S&P is worried that WeWork is going to run out of money. WeWork’s bonds ended trading Thursday at a yield of 10.01%.
With the money from retail investors out of reach, institutional investors and banks must now roll up their sleeves and stick their hands in, and risk getting them cut off in the process, and they’re not eager, and the clock is ticking.
Thursday evening it emerged that WeWork is halting all new lease agreements with landlords in order to reduce the cash burn, “people briefed on the matter” told the Financial Times. It was the latest measure of a whole whirlwind of measures the company undertook over the past two days. WeWork is entering shrink-mode.
On Tuesday, WeWork founder and CEO Adam Neumann, facing a palace revolt among his directors over the collapsed IPO hopes, said that he’d get out of their way and would step down. Co-CEOs Artie Minson and Sebastian Gunningham took over, and they’re not wasting any time. They came broom-in-hand.
They instantly put staff cuts on the table via an email to employees: “We will closely review all aspects of our company with the intention of strengthening our core business,” and they expected “difficult decisions ahead,” which is corporate-speak for big staff cuts. The company employs over 12,000 people globally. A source told the Wall Street Journal that the house cleaners might ax several thousand people.
The broom-swinging co-CEOs are also trying to get rid of three businesses WeWork had acquired since 2017: Managed by Q, Conductor, and Meetup.
Earlier on Thursday, it emerged that WeWork is trying to sell its Gulfstream G650 that it had acquired for $60 million in 2018. Whatever it may get for the used and modified jet will be peanuts compared to the billions of dollars it needs just to get through another year.
But the jet had become one of the symbols of Neumann’s excesses. And it had become a morale problem. “Multiple employees” had told Business Insider in recent weeks that employees were frustrated by the large amounts spent on the corporate jet and on lavish parties, even as managers cited a lack of money when they reneged on promised bonuses and raises.
Also on Thursday, it emerged – WeWork has turned into a sieve, and everything instantly leaks out – that the new house cleaners are going to sweep out the “Adam’s posse” – as one leaker described this group to the Financial Times. The Wall Street Journal reported that “people familiar with the matter” had said that these 20 folks included friends and family members of Neumann and his wife, Rebekah, along with top managers and even the driver of his Maybach that Neuman was chauffeured around in. A base Maybach stickers for around $170,000. This guy knew how to burn through other people’s money in style.
Here’s the thing: the whole WeWork concept was based on endless growth, on growth-at-all-cost. In its hilarious S-1 filing in preparation for the scuttled IPO, WeWork raved about its addressable market of $3 trillion, with a T. The whole idea was growth no matter what. That’s why investors put so much money into it.
But by putting all new lease agreements on ice, and by implementing the other measures that have been emerging on an hourly basis, including the layoffs of thousands of employees and selling three businesses, WeWork has moved from growth-mode to shrink-mode.
It’s goal now is to slow the cash burn to live another day, and forget about growth – which ironically eliminates the last scintilla of reason to invest in something like this: because who would want to invest in a money-losing cash-burning machine that is shrinking?
But its biggest investors and banks that are exposed to it have a reason to throw good money after bad: They don’t want to have to write off the money they have already invested in it, and by giving it more money, they hope that WeWork will make it long enough to where it can be sold to retail investors via an IPO, and then they might get part of their money back.
Softbank, which has already plowed over $10 billion into WeWork, has committed to plowing another $1.5 billion into it next year. Now they’re discussing to increase this to at least $2.5 billion. The thinking is, if it can keep the $10 billion investment from collapsing by throwing another $2.5 billion at it, well, then, by golly, let’s do it for crying out loud.
WeWork is also trying to put together a leveraged loan of $3 billion to $4 billion with a group of big banks. But the banks have gotten cold feet, and they want WeWork to raise a lot of equity first. The IPO was supposed to do that, but now forget it.
All these moves that WeWork is undertaking – getting rid of its CEO, corporate jet, non-core companies, thousands of employees, etc., and freezing all new leases – appear to be systemically designed to induce confidence in the bankers that new management can right the ship, that it can change the culture of the company and can figure out how to somehow turn this massive cash-burn machine into a business.
But once the company switches to shrink-mode, as it is now doing, the rationale for throwing even more money at it is becoming even more elusive.
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