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Another 5 billion reasons to walk away from WeWork

SoftBank Group Corp. needs to cut and run on its entire WeWork investment, not just the shares. Covid-19 and the economics of a prolonged crisis necessitate strict pragmatism.

As recently as two weeks ago, it seemed that a move to renegotiate the Japanese conglomerate’s $3 billion purchase of equity in The We Co. from existing shareholders, including founder Adam Neumann, was savvy and cunning. Today, that looks ill-advised, which is why it decided not to consummate the tender offer, Bloomberg News reported, citing a statement from a committee advising WeWork's board.

After a $1.5 billion lifeline late last year, the next step in SoftBank’s bailout of the office rental company — predicated on completing the share purchase — was to be a further $5 billion in debt financing.

Masayoshi Son, opportunistic venture capitalist that he is, should walk away from that deal, too.

With WeWork bonds trading at around 36 cents on the dollar and the global economy in upheaval over the coronavirus pandemic, there’s no price in the world that could have made SoftBank’s double-down on the shares look smart. Pouring $5 billion into WeWork debt would be a poor use of its funds.

SoftBank has bigger problems at the moment.

Last week, Moody’s Corp. cut its debt by two notches, citing SoftBank’s planned offload of assets that amounts to little more than a fire sale. Son wants to monetize them through sales or loans to repurchase the company’s own shares and pay down debt.

SoftBank fired back at Moody’s. It claimed that the downgrade would “cause substantial misunderstanding,” and then asked Moody’s to remove its rating altogether. That temper tantrum merely proved the ratings provider correct.

Despite a broad portfolio that includes its stake in the Vision Fund, its domestic telecommunications operator, a U.S. telco, and a semiconductor company, the only asset that SoftBank has of significant value is its 25% stake in Alibaba Group Holding Ltd. Those shares aren’t very liquid and could take months to sell. Son doesn’t have time. Many Alibaba investors believe that the e-commerce company has gotten through the worst of the Covid-19 crisis and will benefit from a return to normalcy in China.

What they aren’t reckoning on is an unavoidable global slowdown that could have a profound impact on the spending power of Chinese consumers, who drive revenue. We’re in the eye of the storm now, where things seem calm but soon won’t be. Selling a massive chunk of Alibaba shares at any price is going to become more difficult.

Bad as things might get for an internet giant, they’re going to be a whole lot worse for a shared office company. Co-working spaces are anathema to the wave of social distancing that’s sweeping the world. Many of WeWork’s clients are freelancers or startups and likely to be hardest hit in any downturn. The company is trying to soften the blow by seeking rent reductions from its own landlords, who are showing reluctance.

Walking away from its pending $5 billion investment in WeWork debt is not only an honest verdict on that outlook, it also means $5 billion of shares in Alibaba that SoftBank doesn’t have to sell to cover its funding needs. Ask any investor in the world where they’d prefer to put a chunk of money right now, and I am sure WeWork bonds won’t be their choice.

Masayoshi Son isn’t the type to follow what others might do, but perhaps this time he should.

April 04, 2020

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