SoftBank’s WeWork, once most valuable US startup, succumbs to bankruptcy

On November 6, WeWork, once the most valuable startup in the U.S. and backed by SoftBank Group, took the somber step of seeking U.S. bankruptcy protection. This dramatic turn of events comes in the wake of WeWork’s ill-fated investments in businesses that failed to fully utilize its shared office spaces.

This move signifies an acknowledgment by SoftBank, the Japanese tech conglomerate that owns approximately 60% of WeWork and has infused billions of dollars into its recovery efforts, that the survival of WeWork hinges on renegotiating its costly leases through bankruptcy proceedings.

A spokesperson for WeWork revealed that a substantial 92% of the company’s creditors had agreed to convert their secured debts into equity under a restructuring support agreement, erasing a staggering $3 billion of debt from the company’s balance sheet.

WeWork is also planning to initiate recognition proceedings in Canada. The company asserts that it possesses the financial wherewithal to continue its operations unimpeded. It’s crucial to note that locations outside the U.S. and Canada, as well as its global franchisees, remain unaffected by these developments. As of the end of June, WeWork had a network of 777 office spaces worldwide.

SoftBank expressed its belief that the restructuring support agreement is the most prudent step for WeWork to restructure and eventually emerge from Chapter 11 bankruptcy.

The downward spiral of WeWork’s fortunes has been stark, with its shares plummeting by approximately 98.5% throughout the year. Elusive profitability has plagued WeWork as it grapples with expensive lease commitments and the shift towards remote work, leading corporate clients to cancel their office space subscriptions. A significant 74% of WeWork’s revenue in the second quarter of 2023 was devoured by lease expenses, marking a challenging financial landscape for the company.

In a filing with the New Jersey bankruptcy court, WeWork disclosed assets totaling $15.06 billion against liabilities of $18.66 billion as of June 30.

WeWork is now looking to leverage provisions of the U.S. bankruptcy code to shed onerous leases, a move that has left some landlords bracing for a substantial impact.

Under the leadership of its founder, Adam Neumann, WeWork soared to become the most valuable U.S. startup, boasting a valuation of $47 billion. It secured investments from prominent entities such as SoftBank, Benchmark, and major Wall Street banks like JPMorgan Chase. However, Neumann’s pursuit of rapid growth at the expense of profitability, coupled with revelations about his eccentric behavior, ultimately led to his ouster and the derailment of WeWork’s initial public offering in 2019.

Subsequently, SoftBank found itself compelled to increase its investment in WeWork and appointed real estate veteran Sandeep Mathrani as its CEO. In 2021, SoftBank arranged for WeWork to go public through a merger with a special-purpose acquisition company, valuing WeWork at $8 billion.

WeWork did manage to renegotiate 590 leases, which led to savings of approximately $12.7 billion in fixed lease payments. Nevertheless, this proved insufficient to offset the repercussions of the COVID-19 pandemic, which prompted a shift towards remote work, leaving many office spaces unoccupied.

WeWork faced competition not only from the changing work landscape but also from its own landlords. Commercial property firms that traditionally favored long-term lease agreements began offering short and flexible leasing options in response to the shifting dynamics of the office sector.

Sandeep Mathrani, who previously served as WeWork’s CEO, was succeeded this year by David Tolley, a former investment banker and private equity executive known for his role in guiding the debt-laden satellite communications provider Intelsat out of bankruptcy in 2022.

Despite engaging in debt restructuring efforts, WeWork ultimately succumbed to bankruptcy. Just before filing for bankruptcy, its founder, Adam Neumann, expressed hope that the right strategy and team would facilitate WeWork’s successful emergence from this challenging phase.

Following this announcement, shares in SoftBank, which had significantly written down its investment in WeWork over the years, closed up 0.3% on Tuesday in Tokyo, outperforming a 1.3% decline in the broader market.

In the journey from unicorn to a penny stock, WeWork’s story serves as a cautionary tale about the volatility and challenges of the modern workspace industry.

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