WeWork, the SoftBank Group-backed start-up whose meteoric rise and fall reshaped the office sector globally, sought US bankruptcy protection on Monday after its bets on companies using more of its office-sharing space soured.
The move represents an admission by SoftBank, the Japanese technology group which owns about 60% of WeWork and which has invested billions of dollars in its turnaround, that the company cannot survive unless it renegotiates its expensive leases in bankruptcy.
WeWork said it has entered into a restructuring agreement with key stakeholders to reduce drastically its existing funded debt, and also intended to file recognition proceedings in Canada.
The company’s locations outside of the US and Canada, as well as its franchisees around the word, are not affected by these proceedings, it added. WeWork shares have fallen about 98.5% so far this year.
Profitability has remained elusive as WeWork grapples with its expensive leases and corporate clients cancelling because some employees work from home. Paying for space consumed 74% of WeWork’s revenue in the second quarter of 2023.
In a filing with the New Jersey bankruptcy court, WeWork listed estimated assets and liabilities in the range of $10-billon to $50-billion.
“WeWork could use provisions of the US bankruptcy code to rid itself of onerous leases,” law firm Cadwalader, Wickersham & Taft said in a note to landlords on its website in August. Some landlords are bracing for a significant impact.
“As part of today’s filing, WeWork is requesting the ability to reject the leases of certain locations, which are largely non-operational, and all affected members have received advanced notice,” the company said in a statement.
WeWork’s derailment
Under its founder Adam Neumann, WeWork grew to be the most valuable US start-up, worth $47-billion. It attracted investments from blue-chip investors, including SoftBank and venture capital firm Benchmark, as well as the backing of major Wall Street Banks, including JPMorgan Chase.
Neumann’s pursuit of breakneck growth at the expense of profits, and revelations about his eccentric behaviour, led to his ouster and the derailment of an initial public offering in 2019.
SoftBank was forced to double down on its investment in WeWork, and tapped real estate veteran Sandeep Mathrani as the start-up’s CEO. In 2021, SoftBank cut a deal to take WeWork public through a merger with a blank-cheque acquisition company at an $8-billion valuation.
WeWork managed to amend 590 leases, saving about $12.7-billion in fixed-lease payments. But this was not enough to compensate for the fallout from the Covid-19 pandemic, which kept office workers at home.
Many of its landlords, who were also feeling the squeeze, had little incentive to give WeWork a break on the terms of their leases.
While WeWork had some success in signing up large conglomerates as clients, many of its customers were start-ups and smaller businesses, which cut their spending as inflation soared and economic prospects soured.
Adding to WeWork’s woes was competition from its own landlords. Commercial property companies that traditionally only entered into long-term rent agreements started offering short and flexible leases to cope with the downturn in the office sector.
Mathrani was succeeded as WeWork CEO this year by former investment banker and private equity executive David Tolley, who as CEO of Intelsat helped the debt-stricken satellite communications provider emerge from bankruptcy in 2022.
WeWork engaged in debt restructurings, yet this was not enough to stave off its bankruptcy. The company last week secured a seven-day extension from its creditors on an interest payment, to win more time to negotiate with them.
Read: WeWork reportedly filing for bankruptcy – SA not impacted
Shortly before WeWork filed for bankruptcy, Neumann said in a statement: “I believe that, with the right strategy and team, a reorganisation will enable WeWork to emerge successfully.” — Greg Roumeliotis and Mrinmay Dey, (c) 2023 Reuters
