WeWork’s SPAC Path to Going Public Raises Questions

WeWork’s plan to go public by a merger with special acquisition company BowX Acquisition Corp. boasts a value of $9 billion. Given an expected $1.3 billion in cash planned to fuel growth plans, it’s a positive turn for the flex office provider.

But some are raising their eyebrows and questioning whether the deal is also good for investors.

Shares in BowX had been trading roughly between $10 and $11, according to data from S&P CapitalIQ. Ever since the March 26 announcement, they reached a 52-week high of $13.93. But now shares are under $12 again and the market cap is $718 million.

“Under its new management team, WeWork is repositioning its focus away from smaller businesses and positioning itself as a solution for larger, enterprise customers,” Matt Dmytryszyn, director of investments at registered investment advisor Telemus tells GlobeSt.com. “In a post COVID-19 world, this makes sense as companies relook at their real estate exposure and may not want dedicated space under long-term leases in as many locations.”

Dmytryszyn thinks the valuation is in a realistic realm. “With a transaction market capitalization of $7.2 billion, and a 2020 revenue run rate of $3.2 billion, a 2.5x multiple of revenue is not excessive,” he says. 

He does temper the observation, noting that the company’s stated path to profitability calls for 70% incremental margins by 2023. “This level of incremental margin is not unheard of, but for an early-stage growth business, growing its top-line north of 20%, this may be a challenge to come by,” Dmytryszyn says.

Some are more skeptical.

“I am absolutely one hundred percent convinced that the format of a WeWork—temporary, flexible leases—to be the wave of the future,” Peter C. Lewis, chairman of Wharton Equity Partners, tells GlobeSt.com. 

But WeWork is an intermediary, leasing space from property owners and then subletting to its clients. “You’ll see landlords themselves offering this kind of space,” Lewis says. Property owners could in theory ease WeWork out of the picture.

Patrick Healey, founder and president of financial planning and investment management firm Caliber Financial Partners, thinks the issue is more complicated.

“[Property owners] might not have the operational expertise to do that or the brand recognition,” Healey tells GlobeSt.com. “But let’s say we get out of Covid and the economy starts to normalize. What are the lease arrangements with the landlords? Do the landlords start putting pricing pressure on [WeWork]? At this time, it’s probably helping them because it’s definitely a leaser’s market, but that can change over time and materially impact your business model.”

Then there is opacity in information. For example, in an investor presentation that WeWork sent GlobeSt.com, WeWork uses many pro forma metrics. One, adjusted EBITDA, was reported as a loss of $1.8 billion in 2020, although projected to become a positive $2.0 billion in 2024.

However, the company’s definition of adjusted EBITDA is complicated, starting as “a non-GAAP measure that we define as net loss,” followed by many exclusions, including “income or expense related to the changes in fair value of assets and liabilities remeasured to fair value on a recurring basis,” “significant non-ordinary course asset impairment charges,” and “any impact of discontinued operations, restructuring charges, and other gains and losses on operating assets.”

The net loss language particularly caught Healey’s attention. “It’s like LBITDA: loss before interest, taxes, depreciation, and amortization,” he jokes. “I think [the language is] intentionally convoluted and complex in the hopes of confusing people or obfuscating from being transparent, and the market doesn’t like that. I was amazed the market had the initial reaction it did when that deal was announced. It was mind boggling to me.”