WeWork can be fixed — and there’s a plan, according to SoftBank Group Corp., which offered the cash-strapped, unprofitable office-sharing company a lifeline in exchange for majority ownership.
“Time will take care of things,” SoftBank founder and Chief Executive Masayoshi Son said during an earnings briefing in Tokyo on Wednesday, during which he tried to put a silver lining on the mess his company is now on the hook for. WeWork’s new offices, with their low occupancy rates, are like apples that aren’t ready to be eaten, he said. “We’ll make money once they’re allowed to ripen.”
In a mix of bravado and practicality that’s classic Son, the billionaire opened his speech by describing the earnings announcement as “not good at all.” He then said that turning around WeWork would be “simple” and that his team had a plan to right the struggling company, whose effort to launch an initial public offering this year unleashed a cascade of revelations that culminated in the cancellation of the IPO and ouster of WeWork’s leader.
Son said WeWork’s product — good-looking office space that companies and entrepreneurs can rent short term — was sound, noting SoftBank’s satisfaction with some of its WeWork offices in Japan.
Still, Son admitted that he overestimated the company’s value and later discovered it had all kinds of corporate governance problems, including co-founder Adam Neumann’s outsized power and control rights. Son said he was blinded by Neumann’s positive attributes, including his design of WeWork’s offices.
Son was also intent on making clear that SoftBank has a “no bailout” policy and there won’t be any other rescues among the companies it invests in. “WeWork is the last one,” he said, with free cash-flow potential being the main criterion for evaluating future Vision Fund investments.
To transform the money-losing startup into a profitable company, Son said he’s ordered a halt to new building developments, which tend to lose money for the first year or so before occupancy picks up. Next, he said, he’s slashing expenses and getting rid of all unprofitable WeWork businesses, failing to elaborate on what those were. He added that WeWork could generate $1 billion in annual profit in a few years and that the business in Japan is already making money.
WeWork does seem to be executing on some of Son’s plans. It’s considering giving up office floors in at least half a dozen locations in Hong Kong, people familiar with the matter said Wednesday. Hong Kong has one of the world’s most expensive office markets.
The firm’s new management is also reassessing whether to proceed with about 28 potential office deals in London, its second-largest market. The deals under review are at varying stages, from a preliminary inspection of promising properties to detailed talks.
After WeWork pulled its IPO in September, the troubled group received a $9.5-billion rescue package from SoftBank in exchange for a raft of changes, including the ouster of Neumann. But Son took issue with the characterization of the infusion as a bailout, choosing to describe it as a way to buy in at a cheaper valuation and lower the average cost of its stake in the company.
Son said that he had consulted with lawyers to see if he could back out of a $1.5-billion warrant pledged to WeWork, but they said he couldn’t. Instead, Son decided to buy even more shares at a discounted price, effectively lowering the average cost of his equity in the business.
SoftBank earlier paid about $89.40 a share to acquire 12.8% of WeWork. With the latest investment it has 41.2% at $19.38 a share. SoftBank will take a $4.7-billion hit from WeWork on its non-operating profit, according to Son’s presentation.
As a result of write-downs associated with WeWork, Uber Technologies Inc. and other marquee investments, Softbank reported its first quarterly operating loss in 14 years on Wednesday.
Analysts caution that Son has over-promised and under-delivered before. “It will likely be a lengthy process to fix WeWork,” said Bloomberg Intelligence analyst Anthea Lai.
Banjo and Reidy write for Bloomberg.