Following the backing down of Japan’s investment firm SoftBank from an agreement to buy $3bn of WeWork shares, the office space company’s founder and former chief executive, Adam Neumann, has now threatened to sue the Japanese firm – which is incidentally also the biggest investor in WeWork. The deal would have helped Neumann himself sell out his shares in WeWork worth almost $1bn.
A $3bn share tender rescue deal that hammered out last October to save WeWork from collapse, would not be honored by it. SoftBank, which is run by the Japanese billionaire Masayoshi Son, announced on Thursday.
Since WeWork had failed to meet several conditions, the company had “no choice” but to scrap the rescue deal, SoftBank said. the company also raised issues of “multiple, new, and significant pending criminal and civil investigations”.
SoftbBank remained “fully committed to the success of WeWork” but “several of those conditions were not met, leaving SoftBank no choice but to terminate the tender offer”, the Japanese conglomerate said.
According to analysts, the deal with SoftBank would have significantly benefited Neumann, who planned to sell off shares worth up to $970m even as WeWork had sacked thousands of its employees with little or no compensation.
“Adam Neumann, his family, and certain large institutional stockholders, such as Benchmark Capital, were the parties who stood to benefit most from the tender offer,” SoftBank said. “Together, Mr Neumann’s and Benchmark’s equity constitute more than half of the stock tendered in the offering. In contrast, current WeWork employees tendered less than 10% of the total.”
While stating that it was disappointed that SoftBank had terminated the deal, a special committee of WeWork’s board said, “all of its legal options, including litigation” were being considered by it.
Now since SoftBank has terminated the agreement, it also means that the Japanese firm will no longer be bound to provide WeWork with $1.1bn in debt financing. That essentially now puts the already struggling WeWork with a precarious cash flow and cash at hand situation as its revenues are expected to take a major hit because many of its clients across the world are pulling out because of the coronavirus pandemic and as governments impose lockdowns and strict stay at home orders.
The business model of WeWork involves the company entering into long term lease agreements with commercial landlords while renting pout the spaces to clients on a short term basis. The clients include freelancers and small businesses which have been particularly hit hard because of the coronavirus pandemic globally as well as a virtual halt of the global economy. Bondholders of the company have already been warned that the 2020 financial targets set by it will likely not be achieved by it.
The next global recession could be made worse because of the business model of co-working companies such as WeWork as they would make commercial property cheap as dirt, warned the president of the Boston Federal Reserve bank, Eric Rosengren, in September last year.
(Adapted from TheGuardian.com)