By Vinay Naik, Ratish Singh, Hirishika Rajasekaran and Luc Roberts (University of Warwick), Lucy Chen and Jessica Tang (University of Melbourne)
Overview of the deal
Acquirer: BowX Acquisition Corp. (NASDAQ: BOWX)
Total Transaction Size: $9 billion
Closed date: Q3 2021
Acquirer advisor: PJT Partners
Target advisor: UBS
In its second attempt to go public, office-sharing startup WeWork has entered into a definitive merger agreement with special-purpose acquisition company BowX Acquisition Corp. The transaction values WeWork at a pro-format initial enterprise value of approximately $9bn and will provide WeWork with around $1.3bn of cash to fund future growth plans. This valuation is a mere fraction of the original $47bn value claimed by WeWork in the run-up to its 2019 IPO.
The deal will be funded by $483m of cash in trust by BowX along with a fully committed $800m PIPE (Private Investment in Public Equity). The PIPE will be led by investors including Insight Partners, Fidelity Management & Research Company, Centaurus Capital, funds managed by Starwood Capital, and funds managed by BlackRock.
Having opted to delay its IPO two years ago due to poor management decisions and an increasing mountain of debts, WeWork claims to have steered back on track from the $4bn in losses accrued between 2016 and 2019. Within the past year, WeWork has made progress on its ongoing business transformation through a focus on cost management and smart digital innovations. The pandemic has also accelerated the demand for flexible workspaces, allowing for WeWork to be uniquely positioned to serve the multi-trillion dollar global office space market and future of work. With the world slowly opening up after the global lockdown, WeWork’s management believes this could give the company the boost it needs to dominate. WeWork currently has a $4.0bn total sales pipeline and an estimated $1.5bn in committed 2021 revenue.
“WeWork has emerged as the global leader in flexible space with a value proposition that is stronger than ever. Having Vivek and the BowX team will be invaluable to WeWork as we continue to define the future of work.” - Sandeep Mathrani, WeWork CEO
Company Details: (Acquirer - BowX Acquisition Corp)
BowX Acquisition Corp. is a blank check company formed by the management of Bow Capital, a venture capital fund backing the SPAC. In its August 2020 initial public offering, it raised $420 million by offering 42 million shares at $10 each. BowX had planned to target private companies valued between $1 billion and $3 billion in the technology, media, and telecommunications industries.
Founded in 2020, headquartered in Menlo Park, California, USA
CEO: Vivek Ranadivé and Murray Rode
Market Cap: $0.71bn as of 02/04/2021
Company Details: (Target - WeWork)
WeWork is a private American commercial real estate company that specialises in providing innovative and flexible shared workspace solutions for startup companies within the technology industry, as well as services for other enterprises. The company designs and builds both physical and virtual shared spaces and offices.
WeWork gained mainstream publicity after its failed IPO of company stock in 2019, receiving criticism mainly due to its “[corporate] governance, business model and [in]ability to turn a profit.” (The Wall Street Journal)
Founded in 2010, headquartered in New York City, New York, United States of America
CEO: Sandeep Mathrani
Number of employees: 6,000
Market Cap: N/A (Private company)
EV: N/A (Private company)
LTM Revenue: $3.2bn as of 30/06/2020 [Press Release]
LTM EBITDA: ~$(1bn) as of 30/06/2020 [Fitch Ratings]
Projections and Assumptions
The announcement of the merger between the American real estate company, ‘WeWork’, and the SPAC, ‘Bow X Acquisition’, alone is bound to have an impact. The share price of the latter has risen from US$11.71 on the day of the announcement to US$12.93, which is its current value. Whilst it is a possible indication of facilitating future deals and acquisitions, with the hope that the share price is not too volatile, the size of the increase is arguably insignificant. Despite this, the merger is estimated to raise approximately $1.3bn, allowing WeWork to implement the innovative ideas and strategies that the company has been focusing on in the past year, according to its Chief Executive, Sandeep Mathrani. They are also set to receive $800m in a PIPE injection, which will support its journey to long-term growth by playing its pivotal role in the corporate world.
Labelling ‘WeWork’ as the ‘global leader in flexible space’ shines more light on an energetic kickstart with the partnership of Bow X Acquisition, particularly at a time where the world is undergoing a dramatic structural change in the offices. WeWork has a great opportunity to flourish by helping companies experiment with different work infrastructure and technology as more employees are returning to the offices. After a 47% drop in occupancy rates in 2020, this merger comes in time to reap the rewards of a redefined working environment. It has also brought technological advancements to its forefront, helping it differentiate and withstand the competition. Profitability has been guaranteed in the short term; after the devastating impact of the IPO, which fell through back in 2019, the SPAC is considered to have provided the correct pathway to profitability and additional liquidity.
Covid-19 has accelerated the demand for workspace solutions, with specific emphasis on flexible solutions for dynamic working, and WeWork is uniquely positioned to serve this need. The company is positioned as a leader supported by its platform’s history and global network. Further, the transaction results in substantial cash-on-hand that will enable the company to fund its growth plans. A total of $2.4bn in liquid cash post the deal, including SPAC and PIPE injections, allows WeWork to further invest in improving digital technology and developing unique offerings. The long-term upside is strengthened after considering the company’s successful measures in improving FY20 FCF after $1.6bn of cost-cutting measures while maintaining stable revenues.
The long-term upside of these additional resources and investor guidance will centre around an improved cost structure and strong demand growth. On the cost structure, WeWork can improve by focussing on material portfolio optimisation and exits of non-core businesses. Enterprise companies make up the majority of the company’s memberships while only 10% have month-to-month memberships. This combined with additional data of its customer preferences enables the company to avoid previous mistakes of the building structure to demand mismatch. Further, it should continue to exit underperforming locations such as the 106 leases it closed in December 2020.
On the demand growth side, the company is well-positioned to offer landlords its asset-light technology platform for managing flexible spaces. Future non-core businesses also offer a strong opportunity for upside growth. These include offerings such as On-Demand, All Access, and Platform which allow users to choose from their mobile application where, when, and how they wish to work. This is in addition to already strong demand where the company today has a $4.0 billion sales pipeline. With these initiatives, the revenue forecast for $7bn in 2024 can be achieved even with a lower than stated occupancy rate of 90%.
Risks and Uncertainties
Uncertain demand for office spaces amidst a global pandemic remains to be a big risk for investors as WeWork prepares for its second public offering via a SPAC structure. The company suffered from a loss of $3.2bn in 2020 as COVID-19 shut down its communal workspaces across the globe. By the end of 2020, occupancy rates across WeWork’s portfolio had fallen to 47%, representing a significant decline from 72% before the pandemic.
As global economies slowly adjust to the impact of the pandemic, WeWork has again pitched itself as a “worldwide property technology platform” which provides flexible workspace solutions to enterprises as they switch to hybrid work models.
However, the same doubts raised about its business model during its 2019 IPO roadshows remain today - some investors argue WeWork is not very different from a normal real estate company and faces notable competition in the short-term rental market.
In addition, investors also disagree on whether post-pandemic recovery serves as a “tailwind” for flexible office space, or demand will continue to stay flat as many companies have already locked into long-term leases and excess capacity in the short run. As a result, some investors may be doubtful about WeWork’s projected rebound in occupancy to 90% by the end of 2022 as well as the positive EBITDA forecasted for next year.
“The added long-term opportunity for growth and innovation is what made WeWork a perfect fit for BowX. WeWork [is] at an inflection point, with an incredible roster of key members coupled with the vision and leadership to digitise an enormous industry” - Vivek Ranadivé, BowX Co-CEO