Co-working leader WeWork scrapped plans for an IPO a couple years ago, but we recently learned the company is finally going public through a SPAC merger. Blank-check company BowX Acquisition Corp (BOWX) is taking WeWork public, and at a significantly lower valuation than before its first IPO attempt collapsed. In this Fool Live video clip, recorded on March 29, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss the deal and what investors should keep in mind.
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Jason Moser: Matt, just when you thought it was safe to forget about WeWork, it's back. Yes, the flexible office space specialist has decided it's time to go public again. Of course, Matt, it's going public via SPAC. Is WeWork going to give SPACs a bad name?
Matt Frankel: It depends. It's not in my portfolio, which is why I could talk about it right now. But so on one hand, it might look like you're getting a discount. WeWork first wanted to go public in 2019, if you remember. At the time, Goldman Sachs (NYSE: GS) said their valuation should be about $65 billion.
Frankel: The SPAC IPO that they're doing is at a valuation of $9 billion and that includes the new money being put in. Is that a discount or did it just like come back down to earth a little bit?
Moser: Still seems kind of pricey given what we know today but go on.
Frankel: This factors called BowX Acquisition Corporation ticker symbol is B-O-W-X, by a venture capital fund called Bow Capital. It values WeWork at $9 billion, including debt and including the $1.3 billion in new capital that's being injected into the business. That includes almost a half a billion dollars from the SPAC and another $800 million from a PIPE. If you remember, a PIPE is that investment round that takes place at the same time with private investors. It's kind of really a confidence booster if you see all these big institutions are willing to put their money in. After this is done, WeWork will have $1.9 billion of cash and another $550 million line of credit. That may sound like a lot. WeWork lost $3.2 billion in 2020 and $3.5 billion in 2019.
Moser: Well, no, that sounds like a lot.
Frankel: It does, doesn't it?
Frankel: To be fair, 2020 was not a normal year for offices.
Frankel: We can't really blame them for the 2020 losses. If you remember, after the IPO nonsense in 2019, WeWork, their CEO, they got rid of him. Softbank ended up taking a majority stake which they still own.
Frankel: The new CEO has done a good job of cost-cutting, things like that. Out of that $3.2 billion, more than $1 billion of it was things like impairment charges, writedowns, things like that. They got rid of some underperforming spaces, took a loss, things like that. It was not as bad as they made it sound. They improved their free cash flow, which was still negative. They improved their free cash flow by $1.6 billion over 2019. Impressive given that there was a pandemic going on. They ended 2020 with 47% of their space occupied. That's not great.
Frankel: In all these SPAC deals, they make projections for a few years. They're projecting it will be up to 90% occupancy by 2022. Their thesis is the reopening and the post-COVID world will actually be a net benefit to co-working and flexible office space. When you think of it this way, say you work for Twitter (NYSE: TWTR), has already said that you could work remotely after the pandemic, whatever you want. You leave Silicon Valley, you go somewhere else. You get an apartment wherever, but then you still need a space to work. You don't necessarily want to work from home every day. We've talked about it before, we both enjoy working at home sometimes, but we want the option not to have to work at home.
Frankel: People who are being told they can work from home permanently are going to take their companies up on that and leave the main office, but could work in these flexible or co-working spaces, which I can tell you firsthand, are pretty affordable. I mean, I go to one. They're thinking it could be a net positive for WeWork. The company still has a ton to prove. A loss of $3.2 billion, even if you get rid of all the impairment charges, it was almost $2 billion last year. They have a lot to prove in terms of their path to profitability. I don't care if they have $1.6 billion in the bank if they're losing billions of dollars every year.
Frankel: That doesn't really help.
Frankel: It just buys them a couple of months of wiggle room. I want to see them really have a path to profitability before I would ever consider putting my money in. I like co-working. I like more of the mom-and-pops type co-working spaces like the one I go to with a real community feeling, it doesn't feel as, I guess, as sterile as it has one of the corporate office spaces. Same reason I like Fool HQ. It doesn't feel corporate.
Frankel: I mean, I don't know if it's going to make it long-term, but this definitely gives them new life. I'll tell you that much.
Moser: Indeed it does.