Pretty good article that sums up all of the problems related to WeWork (IPO expected in September). Here’s my tl;dr (although don’t quote me one it):
- Uses an 8.2% discount rate on it’s long-term lease obligations while IWG (it’s closest competitor) uses a 3.7% discount rate. Huge red flag as it effectively understates the liabilities (we’re talking billions of dollars).
- IPO underwriting group (JPM, UBS & CS) alose extended massive personal lines of credit to Neumann. Creates an interesting conflict of interest because if the stock does poorly at the IPO and then there is a margin call, the banks would be forced to sell Neumann’s pledged shares.
- Re-iterating the corporate governance mess (dual-class shares, self-dealing, family involved, etc.).
- Still trades at 15x the valuation of IWG for no apparent reason.
We commented recently that Uber (UBER US) and Lyft Inc (LYFT US)’s results show no signs of any operating leverage or path to profitability. While we are very comfortable with that assessment, we would admit that if an analyst were to be as generous as possible they could arguably sketch out a path to profitability while stretching credulity so far.
This is not so for WeWork Cos Inc (0134620D US). We cannot even fathom the contortions that would be necessary to articulate a path to profitability here.
As for the explanation of the growth of these crazy investments, look at SoftBank. Somehow its always the SoftBank among the investors who throws in $10 billion.
As for the explanation of SoftBank, look for Japan’s retail bond market. SoftBank’s Total Debt to Equity ratio is 205.80. According to FT SoftBank accounts for half the outstanding Japanese corporate bonds (51 percent). Is that crazy or what?
And, while the group’s ¥15.7tn of interest-bearing debt and ¥27tn of total liabilities may mean that western credit rating agencies class it as junk (Ba1, BB+) on the grounds of its high debt and low cash flows, SoftBank has an investment-grade rating from the local agency
It’s like Japanese are trying to create baburu keiki (asset bubble) with only one company.