What Investors Are Missing About the WeWork SPAC Deal
Announcements of companies going public via SPAC seem to have been hitting the news with such frequency that it is rare for one to get major attention. That can’t be said of the news that WeWork is partnering with the Bow Capital SPAC BowX (BOWX). Some may see this as evidence proving what they believe to be the problem with SPACs, that different regulatory requirements allow a company that can’t go public by the traditional route can do so this way. However, these critics might be missing the point.
Looking back, WeWork’s attempt at an IPO in 2019 was big news. Much of that news was driven by founder and CEO Adam Neumann and his management style, but there were also concerns about the company’s concept and business model, and about competition in the space.
Neumann is no longer CEO, and while he retains some ownership and will cash out to some extent as a result of this deal, he will have no board seat or active role in the company. The new CEO of WeWork is Sandeep Mathrani, an experienced real estate executive with proven ability in turnarounds, having taken over at GGP in 2011, just as they emerged from bankruptcy. Mathrani brings a lot of respectability, but there are other, more important differences between now and then.
The first is the competitive landscape.
In 2018, there was a major competitor in the shared workspace in International Workspace Group (IWG) and its U.S. operation, Regus. Since then, both have gone bankrupt. You will hear some people tell you that that is a reason to stay away from BOWX. I mean, if their competitor went under, it must be a terrible business, right? Not necessarily. After all, we are in the middle of a global pandemic, so shared workspace woes shouldn’t really come as a surprise. Plus, the fact that WeWork has emerged intact will give them a competitive edge as things improve.
Of course, there is a big assumption there, in that we will fully return to normal. It could be that behavioral changes in response to Covid will linger and that nobody will want shared office space once it is gone. That, however, is not borne out by the evidence so far. Fully booked cruise ships and crowds at Disney World even before this virus is fully defeated suggests that normal will return quickly in many ways, so why should shared workspaces be the one exception? Granted, the market may be smaller than it was before Covid, but it won’t be destroyed completely and can grow again.
The other knock on WeWork is the leaked documents that showed the company losing $3.2 billion last year despite cutting capex to the bone and with an occupancy rate of only 47%. Again, though, that is a simplistic analysis. The $3.2 billion included around $1.4 billion in charges and depreciation, which means that the loss in EBITDA terms was actually an improvement over 2019, coming on flat revenue. The occupancy rate is misleading too, as it was skewed by multiple new locations that had been agreed upon pre-pandemic coming online last year. Once everything is considered, the numbers for a year like 2020 weren’t actually bad at all, and Mathrani’s prediction of reaching profitability soon doesn’t look that crazy.
All that said, the main point here is not the long-term profitability or viability of WeWork, it is the short-term appeal of the stock. Like with many other stocks, there are risks and assumptions around WeWork fulfilling its potential, but the fact that it has potential at all may be enough to give BOWX a short-term boost. Just about anything that stands to benefit from the recovery is being bought, even when there are significant risks. If stock in airlines, an industry with a long history of bankruptcies, can bounce back to near pre-pandemic levels while flying is still seriously curtailed, why can’t the market leader in what could possibly be a massive growth market do so as well?
The WeWork that entered into the merger with BOWX is a different company than the one that attempted an IPO two years ago. It is led by a respected real estate CEO, it has undergone a massive test of its business and survived and, most importantly, it is now valued at around $9 billion, rather than the $47 billion valuation that floated before the attempted IPO. It is a risky buy, but if you are looking for a recovery play that hasn’t been pushed to its limits already, this may be a possible pick.
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