A sign of the valuation 'adjustments' to come?

Tuesday, 17th September 2019 14:08 - by Shant

We hear that the keenly anticipated IPO of WeCompany - the parent of WeWork - is to be delayed until later this year.   Initial expectations were that the stock market listing was to be conducted this month, but the latest news is that this will not happen until the end of October at the earliest.  A key concern amongst waning investors has been the heavy discount in valuation, which in January was estimated to be in the $47bln region - considered rich by outsiders, but eye-catching enough to draw in some notable investors earlier in the year.  Leading into the anticipated IPO, the valuation has been sheared to between $10-12bln, and as said, this has raised doubts over the company's method of calculation as well as other issues including the sustainability of its business model.  

WeWork, amongst its other brands, WeLive and WeGrow, rents office space on long term contracts, and in turn sublets the space - of varying sizes - on flexible and usually short term contracts.   As a consequence, WeWork has been extremely popular amongst start-ups, but naturally, this carries significant risks during economic downturns.  In the current climate, this will have undoubtedly further weighed on sentiment given the global malaise undermining the growth outlook.

The WeWork model relies heavily on the aesthetic, not to mention harbouring a more community-based working environment using a number of shared spaces where smaller organisations can interrelate.  There is a clear ideal here which has to be appreciated to some degree, but when it comes down to the nuts and bolts of business, this can quickly become a secondary consideration as the cut and thrust of business hits home.  

Consequently, and perhaps as a response to dampened expectations on the global economy, the valuation - which CEO Adam Neumann says is based on the company's 'energy and spirituality' - has been marked down by close to 75%.  This is in spite of rising revenues, but with operating losses of $1.9bln in 2018, this put a completely different spin on the numbers - especially when measured against its rivals.  IWG - previously Regus - enjoyed revenues of £2.5bln last year compared to 'We's' £1.4bln, and had an operating profit of just over £154bln.  IWG was valued at just £3bln last year!

However, the value of the business was not solely down to the We company's own calculations, as the much-hailed Softbank, the Japanese tech giant agreed on a deal worth $4.4bln.  Major US banks including Goldman Sachs have invested also, but the veneer of idealism and novelty has quickly worn off as the harsh realities of life finally kick in. President and CFO Artie Minson remains upbeat however and continues to believe the philosophy of the company points to an eventual yet major disruption of the real estate market.  While some of the company's rivals agree that the shared serviced office - and indeed shared residential - space is ripe for transformation, external factors are cause for a conservative approach.  This has not been helped by recent acquisitions, such as Wavegarden for close to $14mln - a surfing company - whose book value was written down to zero.  

There are also further complications, not least of all the purchase of leases, said to be on buildings owned by in part by Mr. Neumann. Such practices will also not go down well with prospective investors, and we can also assume that the issue of trust (based around this) will also have had a major hand in the waning demand which has prompted such an aggressive drop in valuations.  All this comes at a time when equity valuations across the board are under major scrutiny, and if US stocks are seen (in part) to be safe havens in the midst an 'attractive' asset drought, then the 'We' company will have to do a lot more to gauge with the investment community if not the SEC themselves.

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.