AAnnouncements from companies going public on SPAC seem to have hit the news so frequently that it rarely happens that anyone gets much attention. That can’t be said of the news that WeWork is partnering with Bow Capital SPAC BowX (BOWX). Some may see this as evidence of what they think is the problem with SPACs that different regulatory requirements allow a company that cannot go public the traditional way to do so that way. However, these critics could miss the point.
In retrospect, WeWork’s attempt to go public in 2019 was big news. Much of this news was driven by founder and CEO Adam Neumann and his leadership style, but there were also concerns about the company’s concept and business model, as well as competition in space.
Neumann is no longer CEO, and while he retains some ownership and pays some cash as a result of that deal, he will not have a seat on the board or an active role in the company. WeWork’s new CEO is Sandeep Mathrani, a seasoned real estate manager with proven turnaround skills who took over at GGP in 2011, just as it was emerging from bankruptcy. Mathrani brings a lot of respectability with it, but there are other, more important differences between now and then.
The first is the competitive landscape.
In 2018 there was a big competitor in the common workspace of the International Workspace Group (IWG) and its US Operation Regus. Since then, both have gone bankrupt. You will hear some people say that this is one reason to stay away from BOWX. I mean if your competitor went under it must be a terrible deal, right? Not necessarily. After all, we’re in the middle of a global pandemic so common issues with the workspace shouldn’t really come as a surprise. The fact that WeWork has gotten intact gives them a competitive advantage when things improve.
Of course there is a big assumption there that we will go back to normal. It could be that behavior changes in response to Covid will continue and that no one wants shared office space anymore when it is gone. However, this is not confirmed by the evidence so far. Fully booked cruise ships and the crowds at Disney World even before this virus is completely defeated suggest that in many ways things will quickly return to normal. Why should shared workspaces be the only exception? Admittedly, the market is smaller than it was before Covid, but it will not be completely destroyed and can grow again.
The other problem with WeWork is the leaked documents showing that the company lost $ 3.2 billion over the past year, even though investments were cut to the bone and utilization was only 47%. However, this is also a simplified analysis. The $ 3.2 billion included charges and write-offs of roughly $ 1.4 billion, which means that the EBITDA loss was actually an improvement over 2019 and was due to unchanged sales . The occupancy rate is also misleading as it has been skewed by several new locations for which an online prepandemic was agreed last year. When everything is taken into account, the numbers weren’t bad at all for a year like 2020, and Mathrani’s prediction of reaching profitability soon doesn’t look that crazy.
All in all, this is not about the long-term viability or profitability of WeWork, but rather the short-term attractiveness of the stock. As with many other stocks, there are risks and assumptions that WeWork is reaching its potential, but the fact that it has potential at all can be enough to give BOWX a boost in the short term. Almost anything that can benefit from the recovery is bought, even if there are significant risks involved. If airline stocks, an industry with a long history of bankruptcies, can return to near pre-pandemic levels on the fly, why can’t the leader in what is a potentially massive growth market? ?
WeWork, which merged with BOWX, is a different company than the one that attempted an IPO two years ago. Run by a well-respected real estate CEO, it has gone through a massive test of its business, and survived. Most importantly, it’s now valued at around $ 9 billion, rather than the $ 47 billion that was released prior to the attempted IPO. It’s a risky buy, but if you’re looking for a recovery game that hasn’t reached its limits, this might be a possible choice.
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