Tuesday, October 22, 2019

SoftBank: Throwing Good Billions After Bad Billions (WeWork Edition)

Years ago in the EPJ Daily Alert, I warned about WeWork and how its business model didn't make any sense.

Since then its IPO has been shelved and its founder and CEO, Adam Neumann, has been ousted from management of the company.

Now comes word that SoftBank, which has already invested $9 billion in WeWork, may provide a $9.5 billion in a rescue plan.

According to the Financial Times, SoftBank will emerge with between 60 percent and 80 percent of WeWork’s equity under the package, which involves $5 billion of new debt, injecting $1.5 billion in previously promised equity and an offer to buy up to $3 billion of existing shares.

My perspective is that this is throwing good money after bad.

The fundamental problem with WeWork is not the extravagant over-the-topic spending that was part of Neumann's method of operation but rather the fundamental business model.

WeWork leases space long-term from landlords and then subleases the space on a month-to-month basis. Many of these subtenants are not profitable and only survive by the grace of Silicon Valley which funnels Federal Reserve pumped funds to them.

Once the Fed money pumping stops, whenever that may be, (It's not slowing now), WeWork is going to lose a good chunk of its subtenants and still be saddled with the long-term leases.

It is an insane business model. It is not going to be pretty during the downside of the business cycle.

SoftBank may be appropriately named. Very soft thinking for a bank to be throwing more billions at this structured to fail operation.


1 comment:

  1. How does one get so much for such an obviously bad business model? Is this a way of laundering money?

    If they purchased office buildings to lease short term then I could understand it. Ok maybe short term leasing doesn't work out but at least the loans are backed with the buildings and property that way.

    It's got to be a scam of some sort on some level. It's the only way that amount of money for that business plan can make any sense.