Co-working office company WeWork had initially planned on going public in late 2019. But to put it mildly, things fell through. The company was valued at almost $47 billion in 2019, but its IPO fell apart when investors actually got a look at some of its financials and saw how much money the company was losing. And to say that founder Adam Neumann's management style didn't help matters would be an understatement.
In the end, the company was bailed out by SoftBank, and its valuation plunged to about $8 billion -- just over one-sixth of its pre-IPO value.
However, it looks like the company is thinking of taking another swing at going public, but like many other companies over the past year, the co-working company isn't necessarily looking at using the traditional IPO route this time. Instead, it's reportedly looking to go public through a merger with a special purpose acquisition company, or SPAC.
Here's what we know so far, as well as the basics on how going public through a SPAC works.
What's a SPAC, and how would WeWork use one to go public?
A SPAC, or special purpose acquisition company, is a type of company designed for one specific purpose: to find a private business to take public.
Just like any other public company, a newly formed SPAC completes an IPO to raise capital, usually several hundred million dollars. At the time of its IPO, a SPAC doesn't have any business of its own. The capital it raises in its IPO is put into an escrow account, and the managers attempt to find a "target" business to take public. Since the SPAC has already completed its IPO, it uses its capital to acquire the private company, thereby avoiding the traditional IPO process.
As a simplified example, reports indicate that WeWork could be valued at close to $10 billion right now. If a SPAC raises $500 million, it could offer to "buy" WeWork at a $10 billion valuation. The SPAC investors would own 5% of the combined business.
In reality, there is usually an additional influx of capital by a group of private investors, known as a private investment in public equity, or PIPE. Between the funds raised by the SPAC and the PIPE from private investors, WeWork could raise quite a bit of capital in the deal. It's been reported that WeWork has more than $3 billion on its balance sheet, so this would further bolster the company's financial position -- alleviating a major investor concern from the company's last IPO attempt.
WeWork's valuation would be considerably lower than its last IPO attempt
According to WeWork's executive chairman, SPACs approach the company quite often (not surprising, since there are over 200 SPACs that are currently looking for a target). Reports indicate that WeWork has held talks with at least three SPACs in recent months, and that talks remain ongoing.
While a SPAC deal would inject quite a bit of fresh capital into WeWork, it's important for investors to realize that this is still a money-losing business. On $811 million in third-quarter 2020 revenue, WeWork produced negative $517 million in free cash flow. It's unclear how much of the poor performance can be attributed to the pandemic, as CEO Sandeep Mathrani has said he expects WeWork to be profitable by 2021, but if you were wondering why WeWork might need billions in cash on its balance sheet, this is why.
To be sure, this isn't a done deal. WeWork is apparently talking to several SPACs and hasn't finalized an agreement with any of them. And until we get a closer look at the terms of any merger agreement, it's tough to say whether WeWork could belong on investors' radar this time around.