Co-working office leader WeWork had planned to go public in 2019, but the company's massive financial losses and controversial then-CEO Adam Neumann caused the IPO to be shelved. However, it looks like WeWork is finally getting a second chance at a publicly traded future, as we just learned the company plans to go public via SPAC merger.
WeWork's SPAC merger
WeWork has agreed to merge with a special purpose acquisition company, or SPAC, called BowX Acquisition (NASDAQ: BOWX), a blank-check company sponsored by venture capital fund Bow Capital.
The merger values WeWork at $9 billion, including debt, and will provide about $1.3 billion in new capital to the business. Roughly $480 million of this amount will come from the money in the SPAC's trust account while another $800 million is coming from a separate funding round known as a PIPE (private investment in public equity).
Investors in the PIPE include Starwood Capital, Fidelity Management & Research, and more. After the deal closes, WeWork will have $1.9 billion in cash, as well as a $550 million credit facility provided by SoftBank, which owns a majority stake in WeWork.
How is WeWork's business doing?
The short answer is that WeWork's business isn't exactly doing great, but it isn't doing quite as bad as the numbers suggest. WeWork reported a loss of $3.2 billion last year, and occupancy in its properties plunged to 47% at the end of 2020.
First of all, this is narrower than the $3.5 billion loss WeWork posted in 2019. And as CEO Sandeep Mathrani said on CNBC after the deal was announced, more than $1 billion of the 2020 loss was due to impairment charges and other one-time items, as opposed to actual business losses.
According to the press release announcing the deal, WeWork improved its free cash flow by $1.6 billion in 2020 through expense reductions. The company is now more focused on its core business of providing flexible workspaces and has exited its noncore activities.
Mathrani predicts that office work will rebound in a big way after the COVID-19 pandemic is over and that as a provider of flex space, WeWork will be in a unique position to benefit. For example, many companies plan to let employees work remotely after the pandemic, which could actually be a tailwind for co-working spaces. In fact, the company boldly forecasts that occupancy in its more than 800 co-working locations will rebound to 90% by the end of 2022.
Should you invest?
To be sure, a $9 billion valuation inclusive of new capital is certainly more palatable than the roughly $65 billion some experts anticipated for WeWork prior to its failed 2019 IPO. However, there remain some big unanswered questions, especially regarding WeWork's path to profitability given that billion-dollar losses are showing no signs of stopping.
Plus, with the decreased occupancy caused by the COVID-19 pandemic, it's important for investors to realize that this is a highly speculative stock and should be treated as such. WeWork remains the leader in the co-working space, and if its spaces fill up as much as management seems to think they will in the post-pandemic world, it could end up being a great investment. But that's a pretty big if.