WeWork, once the US’ most valuable startup, falls into bankruptcy under SoftBank.
WeWork Files for Bankruptcy Protection
12:07 PM UTC – November 7, 2023
(Reuters) – WeWork, the SoftBank Group-backed startup whose meteoric rise and fall reshaped the office sector globally, sought U.S. bankruptcy protection on Monday after its bets on companies using more of its office-sharing space soured.
The move represents an admission by SoftBank (9984.T), the Japanese technology group that owns about 60% of WeWork (WE.N) and has invested billions of dollars in its turnaround, that the company cannot survive unless it renegotiates its pricey leases in bankruptcy.
A WeWork spokesperson said about 92% of the company’s lenders had agreed to convert their secured debt into equity under a restructuring support agreement, wiping out about $3 billion of debt.
The company, which also intends to file recognition proceedings in Canada, said it expected to have the financial liquidity to continue business normally and that its locations outside of the U.S. and Canada, as well as its franchisees around the world, were not affected by these proceedings.
WeWork had office space available at 777 locations worldwide as of the end of June.
SoftBank said it believed WeWork’s restructuring support agreement was the appropriate action for the company to reorganize its business and emerge from Chapter 11 proceedings.
“SoftBank will continue to act in the best long-term interests of our investors,” the Japanese company said in a statement
WeWork shares have fallen about 98.5% so far this year.
Profitability has remained elusive, as WeWork grapples with expensive leases and corporate clients cancelling because of a trend toward employees working from home. Paying for space consumed 74% of WeWork’s revenue in the second quarter of 2023, the last time it reported financial results.
In a filing with the New Jersey bankruptcy court, WeWork listed assets of $15.06 billion and liabilities of $18.66 billion as of June 30.
“WeWork could use provisions of the U.S. bankruptcy code to rid itself of onerous leases,” law firm Cadwalader, Wickersham & Taft LLP 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 nonoperational, and all affected members have received advanced notice,” the company said in a statement.
Under its founder Adam Neumann, WeWork grew to be the most valuable U.S. startup 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 (JPM.N).
Neumann’s pursuit of breakneck growth at the expense of profits, and revelations about his eccentric behavior, 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 its CEO. In 2021, SoftBank cut a deal to take WeWork public through a merger with a blank-check 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 startups 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 chief executive 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.
Shortly before WeWork filed for bankruptcy, Neumann said in a statement, “I believe that, with the right strategy and team, a reorganization will enable WeWork to emerge successfully.”
Shares in SoftBank, which has largely written down its investment in WeWork over the years, closed up 0.3% on Tuesday in Tokyo, outperforming a 1.3% fall in the broader market (.N225).
Reporting by Greg Roumeliotis in New York and Mrinmay Dey in Bengaluru; Editing by Arun Koyyur, Rashmi Aich, Jamie Freed and Edmund Klamann
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What are the key factors that led to WeWork’s filing for bankruptcy protection?
Mpany emerge from bankruptcy protection. However, despite efforts to turn the company around, WeWork has now been forced to file for bankruptcy protection in the United States.
WeWork, known for its shared office space model, had experienced a rapid rise and fall in recent years. With the backing of SoftBank Group, the Japanese technology group that owns about 60% of WeWork, the startup was able to expand globally and attract major investments. However, its business model faced significant challenges, especially during the COVID-19 pandemic.
The pandemic shifted the dynamics of office work, with more employees working remotely. This trend led to corporate clients canceling their leases with WeWork, affecting the company’s revenue. Additionally, WeWork struggled with expensive leases that consumed a significant portion of its revenue, making profitability elusive.
In an effort to reorganize and emerge from Chapter 11 proceedings, WeWork sought U.S. bankruptcy protection. SoftBank, as the majority shareholder, believed that this was the appropriate step for the company to take. WeWork also aimed to file recognition proceedings in Canada and assured that its locations outside of the U.S. and Canada, as well as its franchisees, would not be affected.
As part of the bankruptcy filing, WeWork aimed to reject certain leases that were nonoperational. This move would allow the company to alleviate the burden of onerous leases. However, some landlords expressed concerns about the potential impact on their own businesses.
The filing revealed that WeWork listed assets of $15.06 billion and liabilities of $18.66 billion as of June 30. This imbalance further highlighted the financial challenges the company faced.
WeWork had previously attempted to save costs by amending leases, which resulted in savings of $12.7 billion in fixed lease payments. However, the effects of the pandemic proved too significant to overcome. Many of WeWork’s clients, including startups and smaller businesses, cut their spending due to economic uncertainties caused by the pandemic and inflation.
Furthermore, WeWork faced competition from traditional commercial property companies that began offering short and flexible leases to adapt to the changing office sector. This further compounded the challenges for WeWork.
The filing for bankruptcy protection marks the end of an era for WeWork. Under the leadership of founder Adam Neumann, the company had become the most valuable U.S. startup but faced controversies and was eventually pushed out. SoftBank had to increase its investment in WeWork and appointed Sandeep Mathrani as CEO in an attempt to stabilize the company. Despite efforts to steer WeWork towards a successful IPO, the challenges proved insurmountable.
As WeWork enters bankruptcy proceedings, it remains to be seen how the company will navigate this process and emerge from it. The restructuring support agreement with its lenders, converting secured debt into equity, provides some hope for WeWork’s future. However, the road to recovery will likely be challenging, considering the significant debts and uncertainties surrounding the office sector.
In conclusion, WeWork’s filing for bankruptcy protection reflects the company’s inability to sustain its business model amid changing dynamics and the impact of the COVID-19 pandemic. With the support of its lenders and SoftBank, WeWork aims to reorganize its business and emerge from Chapter 11 proceedings. However, the road ahead remains uncertain, and WeWork will need to overcome significant challenges to regain stability and profitability in the office sector.
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