If WeWork’s a Lemon, Then SoftBank Is Grabbing Tequila and Salt

(Bloomberg Opinion) -- WeWork just lost its CEO, its IPO is delayed indefinitely, prospectus details finally reveal massive losses, it’s burning cash like kerosene, and it needs to raise funds imminently.

So, of course key backer SoftBank Group Corp. would throw in more money.

Already a 29% shareholder of The We Co. – WeWork’s official name – SoftBank is discussing whether to increase a $1.5 billion funding pledge by another $1 billion, the Financial Times reported Thursday.

What sounds like folly is probably the savviest thing Masayoshi Son and his team could do right now.

Naturally there’s a caveat to that extra $1 billion: SoftBank would get to change the terms of a warrant agreement and reduce the price at which it acquires WeWork stock, the FT reported. This means that whenever SoftBank sells off its stake, the possible upside from its investment increases – or at the very least, the downside from a worsening valuation narrows.

Earnings at the $100 billion SoftBank Vision Fund, and by extension SoftBank Group, rise and fall on the value of its holdings in private and public companies. With post-IPO declines at Uber Technologies Inc. and Slack Technologies Inc., the Vision Fund risks posting a large loss this quarter. A successful WeWork IPO would have filled in that hole and then some. But that’s not going to happen, making a delayed IPO a better choice for SoftBank than a low-value one.

As my colleague Shira Ovide points out, new leadership at WeWork may not be able to turn around the business given $50 billion of lease commitments. This means that chances of an eventual WeWork IPO fetching the most recent $47 billion valuation are slim. 

But it’s too late for SoftBank to back out. The company is in deep, and any reduction in the IPO price is going to hurt. Since cutting its losses and walking away isn’t an option – as WeWork’s biggest outside investor, SoftBank has just as much to lose – the best thing Son can do is double down and use that massive checkbook he has to cut a better deal.

Upping the ante, at a lower valuation, will force the Vision Fund to write down its current holdings in WeWork. A weakened IPO, or even talk of a weakened IPO, would force that to happen anyway. At least this way SoftBank can leverage WeWork’s desperation to lower the average price at which its own stake was acquired.

Out of all the investments the Vision Fund has made so far, WeWork could turn out to be the biggest lemon. At least SoftBank is reaching for the tequila and salt.

To contact the editor responsible for this story: Rachel Rosenthal at rrosenthal21@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

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