WeWork: Neumann redefines key man risk as IPO looms

COPYING AND DISTRIBUTING ARE PROHIBITED WITHOUT PERMISSION OF THE PUBLISHER: SContreras@Euromoney.com

By:
Published on:

WeWork’s pre-IPO financial disclosures have done little to quell disquiet over the company and its high-spending CEO.

neumann_wework_780
Adam Neumann, co-founder and CEO of WeWork, is understood to have cashed out roughly $700 million from the company

Lending money to charismatic chief executives of valued clients has long been an important business line for the world’s investment banks, but it is a risky business.

For several US investment banks, this was made brutally apparent in 2018. The now notorious $1.6 billion margin loan they extended to former Steinhoff chairman Christo Wiese in 2016 blew up following the $17.4 billion accounting fraud uncovered at the South African conglomerate. The episode saw Bank of America take a $292 million charge against its exposure, JPMorgan $143 million and Citi $130 million.

Although the losses were down to fraud, the episode highlighted how risky margin lending can be. It is interesting to note, therefore, the extent of personal loans and credit that have been extended by many of these same banks to workspace sharing company WeWork’s colourful co-founder and CEO, Adam Neumann.

JPMorgan, which has been awarded the lead role on WeWork’s upcoming $3.5 billion IPO, is Neumann’s most generous creditor. The bank, together with UBS and Credit Suisse, has lent Neumann $500 million, using his privately held shares as collateral. The firm’s recent S-1 filing shows that $389 million of the loan remains outstanding.

JPMorgan has also lent Neumann $97.5 million in loans and credit that are secured against his real estate holdings rather than his stake in the shared-office provider. Neumann has a stake in four commercial buildings that are leased to WeWork, and on which the company paid $20.9 million between 2016 and June 2019. These four leased properties, plus six other commercial properties that Neumann owns, have now been transferred to ARK Capital Advisors, WeWork’s own property management and acquisition vehicle. 

Neumann and his wife also own a house in the Hamptons, a six-bedroom townhouse in Greenwich Village, a 60-acre estate in Westchester and four apartments in the Gramercy district of Manhattan. They are believed to have spent more than $80 million on residential property since 2010 – buying a $21 million property in San Francisco just last year.

Cashing out

Neumann is not just borrowing from the banks; he is borrowing from the company as well. WeWork lent Neumann $7 million in June 2016, a loan which he repaid in full the following year. But in April this year, the company lent him a further $362.1 million in what was described as an “early exercise of a stock option”. Indeed, Neumann is understood to have so far cashed out roughly $700 million from the company, via loans and stock sales.

This seems like an awful lot for a company that posted a $689 million loss in the first half of this year. WeWork has acknowledged that: “We have a history of losses and, especially if we continue to grow at an accelerated rate, we may be unable to achieve profitability at a company level... for the foreseeable future.”

It takes more than that to put investors off these days, as appetite for a raft of recent unprofitable tech start-up IPOs has shown. But WeWork really has form in pushing the envelope on financial metrics. Its use of “community-adjusted EBITDA” for its debut high-yield bond issue has become bond market folklore.

One name that is conspicuous by its absence on Neumann’s margin loan is Morgan Stanley. The US bank is also not on the IPO. Along with JPMorgan, the deal is being underwritten by Goldman Sachs, Bank of America, Barclays, UBS, Citigroup, Credit Suisse, HSBC and Wells Fargo. They have pledged to provide $6 billion in debt to the company as part of the deal – something that Morgan Stanley is understood not to have been prepared to do in sufficient scale to satisfy the company.

Cautionary tales

Both JPMorgan and Morgan Stanley have experience in underwriting tech IPOs that did not necessarily go as planned: JPMorgan led Lyft’s IPO in March and Morgan Stanley was lead underwriter on the Uber float in May. Both deals stumbled and were seen as cautionary tales for taking tech start-ups public.

Even by current market standards, $6 billion does seem an awful lot of additional debt for a company that admits it isn’t going to make money any time soon. Yes, it doubled revenues in the first half of the year to $1.54 billion – but it also doubled costs, to $2.9 billion. Its net loss stood at $904.65 million at June 30, up from $722.9 million for the same period last year. But that figure was flattered by core investor Softbank’s conversion of a $1 billion convertible bond that resulted in a $486 million one-off gain for the firm.

WeWork has attracted a deluge of negative press around the IPO – focused primarily on its substantial losses and confusing and opaque financials, but not helped by Neumann’s own stream of hipster platitudes: “Make a Life, Not Just a Living” is the company motto.

Could this be a deal too far for the IPO market? It all depends on the extent to which investors buy in to a story that its core backer – Japanese technology conglomerate Softbank – seems to be cooling on. The idea of shared office spaces is not new: the much larger IWG (previously Regus) has proved that it can be profitable. But there is still so much about WeWork that makes investors nervous. 

In January this year, Softbank decided to slash further planned investment in the company by 87.5% from a mooted $16 billion to just $2 billion. Just how investors in the IPO will react remains to be seen.