WeWork (WE) $0.26
The sudden departure of WeWork’s CEO after just three years at the helm came as a big surprise to me. The fact that the company has not turned around and is now a penny stock was not the surprising part. The writing was already on the wall. I had fully expected Sandeep Mathrani to stay on through a bankruptcy and then lead a leaner WeWork post-bankruptcy.
I wrote the following about the company in our March 2022 Special Situations Newsletter, which I have temporarily moved out of the paywall so everyone can access it here:
Earlier this month I met with a couple of successful serial entrepreneurs at the Salesforce tower in San Francisco. The location was a WeWork office spanning the 36th, 37th and 38th floors of the tallest building in San Francisco and the views of the Bay Bridge were absolutely stunning. It is no wonder that WeWork calls it a “one-of-a-kind” location in its portfolio.
Interestingly the subscription to use this space was modest. Another friend that works predominantly from WeWork locations across the U.S. is also a big fan and prompted me to take a closer look at the company.
For our last SPAC Attack idea, where we looked at SPAC Business Combinations for potential short ideas as discussed in our January 2022 mid-month update, we picked an online gambling company called Cordere Online (CDRO). The company performed as we had anticipated and the stock is down nearly 24% in a single month. What I had not anticipated was just low the liquidity for this stock was, making the borrowing of the stock to short challenging. This time around, I decided to focus on a company that had ample liquidity and is a potential short candidate.
As a note of caution, I would like to once again reiterate what we wrote in the February newsletter about shorting,
Short selling is a difficult activity under normal conditions and one has to only read David Einhorn’s Fooling Some of the People All of the Time: A Long Short Story to understand how challenging an endeavor it can be. Recent years have been even more difficult for short sellers as momentum and meme stocks like AMC and Gamestop have obliterated the few short sellers that were still left standing. The reason legendary short seller Jim Chanos is still in the game is because his firm Kynikos Associates runs portfolios that can be 190% long and 90% short for net 100% long exposure.
Origin Story
WeWork was originally founded by Adam Neumann and Miguel McKelvey, both who had cofounded another office space business known as Green Desk in 2008. After selling that
company, Neumann and McKelvey embarked on their “space-as-a-service” journey, rapidly expanding the company’s various locations across the globe.
Over the years, the company made a series of investments and acquisitions – some of which,
like its acquisition of Managed by Q (a service that helps office owners book various services such as cleaning services) or the acquisition of Spacemob (its primary competitor in Singapore) made sense. But along with these reasonable acquisitions and investments came a fair share of questionable ones, ranging from the purchase of various coding bootcamps and teaching services like the New York based Flatiron School, or even the acquisition of Wave Garden, which was in the business of artificially generating waves for surfing and other water activities.SPAC Merger with BowX Acquisition Corp.
In its pursuit to grow at all costs, WeWork managed to burn through billions of dollars and its charismatic founder managed to find an increasingly long cadre of investors that did not bat an eyelid at Neumann’s private use of a $60 million luxurious corporate jet.
Nor did they appear to be concerned with Alibaba (BABA) style related-party transactions in which WeWork (as a company) paid Neumann $5.9 million in stock to acquire the trademark “We” from him. When the company filed to go public, the intense scrutiny it came under caused it to scrap its plans for a traditional IPO and its largest shareholder SoftBank asked Neumann to step down as CEO. The company’s parting gift to Neumann was a garangatuan exit package consisting of $245 million worth of company stock and $200 million in cash.
On March 26, 2021, WeWork and BowX Acquisition (run by Vivek Ranadivé), a special purpose acquisition company, announced a business combination and WeWork eventually went public the SPAC route on October 21, 2021. WeWork’s biggest investor remains Japan based SoftBank, run by Masayoshi Son. With over $100 billion in its Vision Fund, geared toward funding startups in the tech industry, SoftBank had a large stake in both Uber and Slack, among various other companies. The Vision Fund has had a rocky year on account of declines in some of its public holdings including Chinese ride sharing company Didi, Korean E-commerce company Coupang and WeWork.
The Short Thesis
Warren Buffett said,
“When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.”
This is how I feel about WeWork after looking into the company as a potential long opportunity. I wanted to like the company based on the value-added product they offered and the potential for growth both in its core business as well as ancillary services. With occupancy at just 59%, there is a lot of room for growth in occupancy and the company probably has pricing power given how inexpensive its current offerings are. WeWork also offers services like Workplace by WeWork, which is space management software that other companies can use to optimize its office space.
A quick glance at WeWork’s income statement and balance sheet dashed all hope of a potential turnaround story. Once valued at $50 billion, the company has fallen sharply and currently has a market cap of $4.42 billion. The market cap is just one part of the story and once you account for net debt of $3 billion on the balance sheet, WeWork’s enterprise value stands at $7.42 billon. Capitalized leases of $18.4 billion push up the EV to $25.82 billion. Net debt of $3 billion could be manageable for a company that generated revenue of $661 million in a single quarter. Unfortunately Q3 2021 revenue shrunk significantly from $811 million in Q3 2020 and the company reported a net loss of $844 million.
For the year 2020, net loss was $3.8 billion and that loss increased to $5 billion during the trailing twelve months. To WeWork’s credit, free cash flow numbers were not as dismal with negative cash flow of $2.3 billion in 2020 and negative cash flow of $2.37 billion in the trailing twelve months.
Turnaround situations rarely turn around and if they happen to be leveraged companies, the probability goes down even more. Add a money losing operation that is seeing increasing cash outflows combined with shrinking revenue and you have a potential disaster.
WeWork is currently headed by Sandeep Mathrani, the former CEO of General Growth Properties. GGP Inc was a real estate and shopping mall company that had just undergone a Chapter 11 bankruptcy when Mathrani took over in 2010. Mathrani was able to transform the company, eventually selling it to Brookfield Property Partners in 2018.
Mr. Mathrani potentially stands a chance of doing the same thing at WeWork but doing so without wiping out debt and exiting capital leases in a bankruptcy is a tall order. At best WeWork is likely to languish at current levels and at worst, the stock could easily lose half its value in the coming months or go bankrupt if they can’t get the bleeding to stop.
The stock, which was trading at $6.40 is now trading for just 26 cents. Based on the latest $500 million of high interest financing it received from Rajeev Misra, the company appears to be headed for a reorganization. The post-bankruptcy equity would certainly be worth looking into because the business model is far from broken.
There are three WeWork locations within 5 miles of where I live and one location added an entire floor in a building a few weeks ago. Another location is fully leased to a single company. The office/commercial downturn might also be beneficial for them coming out of a reorganization.
Reverse Stock Split
WeWork revealed in April that the NYSE exchange had sent a “continued listing standard notice” claiming that it had been out of compliance since April 11, 2023, which might result in delisting. WeWork received this notification after the company’s average share price dropped below $1 for 30 straight days and a six-month countdown began for the company to avoid being delisted from the market.
According to The Real Deal, WeWork also requested shareholder approval for a “reverse stock split” in an effort to boost the value of its stock before the company released its earnings on May 9, 2023.
Reuters reported that in March WeWork struck a deal with SoftBank and other investors to significantly reduce its debt by about $1.5 billion and extend the date of some maturities to preserve cash as it struggles to turn a quarterly profit since going public. WeWork said that the deal will reduce its overall debt to less than $2.4 billion by canceling or converting around $1.5 billion of the company’s debt into equity. The company will also get an additional two years to pay down the remaining $1.9 billion in debt, until 2027.
WeWork revealed intentions of closing 40 underperforming facilities in the US in November of last year, eliminating 41,000 workstations in the process. In January, the company announced plans to lay off 300 employees across countries to cut costs as high inflation impacts office workspace spending.
Executive and Board Member Departures
On May 16, 2023, WeWork (WE) revealed that Sandeep Mathrani will be stepping down as Chairman, Chief Executive Officer, and director of WeWork effective May 26, 2023. Mr. Mathrani informed the board of his intention to step down on May 10, 2023. Current WeWork Board member David Tolley has been appointed as Interim Chief Executive Officer.
Mr. Mathrani is departing after a 3-year tenure to join private equity firm Sycamore Partners and serve as a Director overseeing the firm’s real estate activity. During Mr. Mathrani’s tenure, WeWork eliminated over $2.3 billion of recurring costs.
Lead Independent Director Bruce Dunlevie also notified WeWork of his intention to resign from the Board on May 8, 2023, effective the very next day. The filing states that the resignation was not the result of any disagreement with the company. Daniel Hurwitz was appointed as Lead Independent Director, serves as Chairman of the Board and also leads a special committee to search for a permanent Chief Executive Officer.
First Quarter 2023 Results (Investor Presentation)
Welcome to edition 41 of C-Suite Transitions, a weekly series on InsideArbitrage that tracks appointments and departures at publicly traded companies during the prior week. We highlight five appointments and departures each week by picking the largest companies from the full list of management changes.
Sudden Departures
Appointments
1. AutoNation (AN): $135.01
On May 11, 2023, the Board of Directors of AutoNation appointed Thomas Szlosek as Executive Vice President and Chief Financial Officer of the company, effective August 7, 2023.
MarketCap: $5.98B | Avg. Daily Volume (30 days): 610,498 | Revenue (TTM): 26.63B |
Net Income Margin (TTM): 4.90% | ROE (TTM): 59.71% | Net Debt: $6.65B |
P/E: 5.32 | Forward P/E: 5.84 | EV/EBIDTA (TTM): 5.90 |
P/S (TTM): 0.26 | P/B (TTM): 3.04 | 52 Week Range: $94.92 – $158.30 |
MarketCap: $4.25B | Avg. Daily Volume (30 days): 512,668 | Revenue (TTM): $970.42M |
Net Income Margin (TTM): 19.49% | ROE (TTM): 30.00% | Net Cash: $388.66M |
P/E: 22.90 | Forward P/E: N/A | EV/EBIDTA (TTM): 17.44 |
P/S (TTM): 4.47 | P/B (TTM): 6.01 | 52 Week Range: $46.41 – $136.38 |
3. PulteGroup (PHM): $69.5
On May 16, 2023, PulteGroup announced that Matthew Koart was appointed Executive Vice President and Chief Operating Officer of the Company, effective May 18, 2023
MarketCap: $15.48B | Avg. Daily Volume (30 days): 3,310,020 | Revenue (TTM): $16.66B |
Net Income Margin (TTM): 16.18% | ROE (TTM): 32.32% | Net Debt: $1.17B |
P/E: 5.98 | Forward P/E: 8.83 | EV/EBIDTA (TTM): 4.60 |
P/S (TTM): 0.90 | P/B (TTM): 1.57 | 52 Week Range: $34.68 – $69.68 |
4. DocuSign (DOCU): $52.29
On May 16, 2023, DocuSign announced that Blake Grayson would be joining the company as its Executive Vice President and Chief Financial Officer for the first quarter of fiscal 2024.
MarketCap: $10.17B | Avg. Daily Volume (30 days): 2,746,063 | Revenue (TTM): $2.52B |
Net Income Margin (TTM): -3.87% | ROE (TTM): -21.83% | Net Debt: N/A |
P/E: -103.61 | Forward P/E: 21.01 | EV/EBIDTA (TTM): N/A |
P/S (TTM): 3.95 | P/B (TTM): 16.20 | 52 Week Range: $39.57 – $92.04 |
5. Darling Ingredients (DAR): $63.14
Darling Ingredients announced Matt Jansen has been named as Chief Operating Officer, North America.
MarketCap: $9.76B | Avg. Daily Volume (30 days): 1,449,171 | Revenue (TTM): $6.96B |
Net Income Margin (TTM): 10.57% | ROE (TTM): 19.59% | Net Debt: $$4.86B |
P/E: 13.62 | Forward P/E: 11.48 | EV/EBIDTA (TTM): 12.81 |
P/S (TTM): 1.57 | P/B (TTM): 2.62 | 52 Week Range: $51.77 – $87.59 |
1. Valero Energy (VLO): $112.10
On May 9, 2023, Valero Energy Corporation announced Joseph W. Gorder Chief Executive Officer retires on June 30, 2023, and will become Executive Chairman of the Board.
MarketCap: $39.64B | Avg. Daily Volume (30 days): 4,687,603 | Revenue (TTM): $169.09B |
Net Income Margin (TTM): 8.10% | ROE (TTM): 59.22% | Net Debt: $3.82B |
P/E: 3.10 | Forward P/E: 5.33 | EV/EBIDTA (TTM): 2.27 |
P/S (TTM): 0.25 | P/B (TTM): 1.69 | 52 Week Range: $94.73 – $159 |
2. Marriott Vacations Worldwide (VAC): $127.10
On May 5, 2023, Anthony E. Terry, Executive Vice President, and Chief Financial Officer of Marriott Vacations Worldwide Corporation, notified the company of his intention to retire from the company later this year. Mr. Terry did not specify a specific retirement date.
MarketCap: $4.56B | Avg. Daily Volume (30 days): 409,527 | Revenue (TTM): $3.36B |
Net Income Margin (TTM): 12.51% | ROE (TTM): 15.84% | Net Debt: $5.16B |
P/E: 12.84 | Forward P/E: 11.93 | EV/EBIDTA (TTM): 9.99 |
P/S (TTM): 1.31 | P/B (TTM): 2.00 | 52 Week Range: $108.50 – $165.07 |
3. TransUnion (TRU): $69.51
On May 8, 2023, Abhinav Dhar, Executive Vice President, Chief Information & Technology Officer, notified TransUnion that he intends to resign from the company to pursue other opportunities effective July 1, 2023
MarketCap: $13.23B | Avg. Daily Volume (30 days): 1,507,934 | Revenue (TTM): $3.73B |
Net Income Margin (TTM): 7.34% | ROE (TTM): 6.42% | Net Debt: $5.15B |
P/E: 51.52 | Forward P/E: 17.76 | EV/EBIDTA (TTM): 15.63 |
P/S (TTM): 3.27 | P/B (TTM): 2.88 | 52 Week Range: $50.16 – $89.67 |
4. WeWork (WE): $0.26
WeWork announced that Sandeep Mathrani will be stepping down as Chairman, CEO, and director of WeWork effective May 26, 2023
MarketCap: $745.42M | Avg. Daily Volume (30 days): 6,826,231 | Revenue (TTM): $3.33B |
Net Income Margin (TTM): -55.96% | ROE (TTM): 74.03% | Net Debt: $18.65B |
P/E: -0.14 | Forward P/E: N/A | EV/EBIDTA (TTM): -58.60 |
P/S (TTM): 0.10 | P/B (TTM): N/A | 52 Week Range: $0.35 – $8.08 |
5. Blue Bird (BLBD): $21.21
On May 13, 2023, Matthew Stevenson, President and Chief Executive Officer tendered his resignation from employment and from the Board of Directors effective June 5, 2023.
MarketCap: $705.44M | Avg. Daily Volume (30 days): 344,094 | Revenue (TTM): $999.30M |
Net Income Margin (TTM): -3.37% | ROE (TTM): N/A | Net Debt: $123.64M |
P/E: -20.83 | Forward P/E: 47.17 | EV/EBIDTA (TTM): N/A |
P/S (TTM): 0.83 | P/B (TTM): N/A | 52 Week Range: $7.14 – $27.75 |
If you are reading this article and have not signed up to receive such articles by email, please sign up either for our free, IA Plus or IA Premium service here. If you are an existing subscriber, you can login to the InsideArbitrage.com website to adjust the kinds of articles you receive by email by turning on or turning off specific categories of articles.