WeWork filled out its long-awaited S-1 application, and it is expected that this IPO will be one of the largest in 2019, giving way to the May UBER IPO.
Some publications are ironic that this is not a “technological IPO, but rather a soap opera.” It is easy to understand what exactly confuses analysts, because in S-1 there are a large number of surprises for investors, both hidden and lying on the surface.
Wework finally disclosed general financial indicators before the placement, which showed accelerating losses, expensive lease agreements, and most importantly, the difficult position of CEO Adm Neumann, whose influence will not disappear after the IPO.
WeWork indicated in an IPO statement that losses rose to more than $ 900 million in the first six months of the year, and this was against a net loss for 2018 of $ 1.9 billion. Mass losses have become an integral part of the IPO of unicorns, just remember Uber and Lyft. Investors will have to trust strongly that WeWork will show signs of a sustainable economic model. Moreover, the mathematics of the model is such that during the year WeWork may be completely without money.
At a cost of $ 150-200 million per month, the company has about six months before it can face a financial crisis. In fact, it attracts money for wholesale redemption of long-term lease agreements with lessors for a period of up to 15 years, while at the same time offering its members short-term lease agreements for two years. If you follow the liquidity indicator in the statements, it is steadily falling. At the time of a recession in the market, this can be a very big risk in a recession. The decline in company membership income also raises some concerns.
WeWork estimates the total market at $ 945 billion, applying average earnings per member at WeWork to a potential future member of the group. However, per-member income will decrease in the future as it enters the international market with cheaper markets. If WeWork already has problems with increasing the average income per participant, it can be difficult to get shareholders to pay a couple extra dollars per share for things like software or other services.
Also an interesting piece is obtained with the structure of the company. After WeWork was renamed We in April, it adopted a complex corporate structure called an umbrella affiliate corporation, or Up-C.
In essence, this has turned WeWork into a limited liability company. We controlled it and set up joint ventures in Asia, as well as other related businesses, such as the ARK Capital Advisors fund, which oversees global property management and acquisitions.
According to the Financial Times, the Up-C structure has tax incentives for Neumann and other executives, as they will be able to pay tax on any profit at an individual income tax rate. However, shareholders who come to an IPO will be double taxed, as the holding company will be taxed on income, and investors will pay another dividend tax.
WeWork also faces unique risks when operating in China. Business in the region is run by groups that it cannot control, local laws vary in lease duration, and it is subject to the China Cybersecurity Act 2017, which gives the Chinese government access to corporate data.
With the creator and its Chairman of the Board of Directors Adam Neumann, there’s an interesting story in general. If you bet on WeWork, you bet personally on Neumann. It controls most voting rights through shares of Class B and C companies, both classes having 20 votes per share, compared to Class A shares, which have one vote per share. Neumann shares may further increase as a result of the option before an IPO of about 42.5 million shares, which will be transferred over the next 10 years.
This is further complicated by the fact that WeWork rents and pays for the rental of buildings partially owned by Neumann. He owns shares in four WeWork leased commercial properties, S-1 says. In the period from 2016 to June 2019, the company paid $ 20.9 million. The United States to lessors who oversee these leases, including, in fact, Neumann himself!
In addition, when WeWork was renamed We in April, the company acquired the We brand from We Holdings LLC, an investment company of Neumann and co-founder Miguel McKelvey. As part of the transaction, We Holdings LLC acquired an additional stake in We worth $ 5.9 billion! These are precisely the deals that investors least want to see, as this allows the “old shareholders” to make a cashout, with tremendously growing losses and worsening earnings per member. We must understand that the departure of Neumann from the company will almost unpredictably affect the business and capitalization of the company.
Thus, we get one of the main factors of guaranteed business development – the identity of the Chairman of the Board of Directors, Adam Neumann, who actually already secured a monetary “pension” before and after the IPO, will continue to control the company with his wife. Moreover, he will remain united in the company in all faces, which resembles the well-known Tesla model with Ilon Mask.
For the whole set of factors – this is an IPO long awaited and no more risky than others. An interesting creative model, adventurous execution, as a matter of fact not “technological”, but almost financial business at work with liquidity and obligations. Well and yes, you need to trust handsome Adam Neumann. In everything. 100%