SoftBank Group Corp. has agreed to spend more than US$10-billion to take over WeWork, doubling down on an ill-fated investment and paying off its co-founder Adam Neumann to relinquish control, people familiar with the matter said on Tuesday.
The deal represents a stunning reversal of fortune for the U.S. office-space sharing startup, as well as its largest shareholder, SoftBank, which with the latest commitments will have spent more than US$19-billion on a company that is now valued at just US$8-billion.
The setback comes as SoftBank chief executive Masayoshi Son is seeking to persuade investors to participate in the Japanese company’s second mammoth Vision Fund, for which he is seeking to raise US$108-billion. To stem WeWork’s bleeding, SoftBank will need to reverse its widening losses and find a way to make it profitable.
The rescue financing also marks a dramatic fall from grace for Mr. Neumann, who as recently as last month was preparing to take WeWork public as chief executive after attaining a US$47-billion valuation for it in January.
While WeWork employees now face the prospect of thousands of layoffs, Mr. Neumann has secured a US$685-million side deal with SoftBank to step down from the board of WeWork’s owner, the We Co., the sources said.
Mr. Neumann faced margin calls on his personal borrowings against WeWork’s private stock as a result of the collapse of the company’s valuation. SoftBank has agreed to extend to him a US$500-million loan to a credit line from JPMorgan Chase & Co., as well as pay him a US$185-million fee for a four-year assignment as a consultant to WeWork, one of the sources said.
Mr. Neumann had drawn down on US$395-million on JPMorgan’s credit line, another of the sources added. Under the terms of the deal with SoftBank, he must use the proceeds of selling his stock to first repay the loan extended to him by SoftBank, according to the source.
Even though he will give up his board seat, Mr. Neumann will get two representatives on WeWork’s board, according to one of the sources.
Reuters first reported on Monday that Mr. Neumann was negotiating stepping down from the board and would serve as an adviser.
“The consulting arrangement is mind boggling. It’s terrible governance. Why pay the guy who got WeWork into this mess for advice? It’s adding insult to injury and a little more injury too,” said Nell Minow, vice-chair of shareholder advisory firm ValueEdge Advisors.
Nevertheless, some WeWork investors said they supported the deal.
“Adam is a visionary who has created an impactful company which has transformed the way many people work, live and think. We think he deserved to take some money off the table for his contribution to the company,” said All Blue Capital managing partner Matt Novak. He declined to say how big his firm’s stake in WeWork is.
WeWork did not immediately respond to requests for comment, while SoftBank and a spokeswoman for Mr. Neumann declined to comment.
SoftBank will provide US$5-billion in new money to WeWork in the form of debt, the sources said. WeWork picked SoftBank’s offer over an alternative US$5-billion debt package submitted on Monday by JPMorgan, the sources said.
SoftBank will also accelerate a previous US$1.5-billion equity commitment to WeWork in the form of warrants that are due in April, the sources said.
SoftBank will additionally launch a tender offer for up to $3-billion to acquire WeWork shares from existing investors and employees, the sources added. Mr. Neumann’s ability to tender his shares will be capped at US$970-million, one of the sources said. He currently owns a little more than a fifth of WeWork, and is expected to retain a stake.
Based on the outcome of the tender offer, SoftBank could own between 60 per cent and 80 per cent of WeWork, but will seek to avoid consolidating the company on its books, one of the sources added. SoftBank and its first US$100-billion Vision Fund already own about a third of WeWork through previous investments totalling US$10.6-billion.
“We hope Softbank can execute on this enhanced vision, through leveraging its strategic partnerships, or otherwise, and bring back value to WeWork’s minority shareholders,” said All Blue Capital’s Mr. Noval, adding that his firm will be holding on to its stake because it views SoftBank’s tender offer price as too low.
WeWork abandoned its initial public offering last month, after investors questioned its large losses, the sustainability of its business model and the way it was being run by Mr. Neumann, who gave up his CEO title last month. He had retained his position as chairman of the We Co.
SoftBank chief operating officer Marcelo Claure will succeed Mr. Neumann as the We Co.'s board chairman, according to the sources.
Artie Minson, previously WeWork’s chief financial officer, and Sebastian Gunningham, who was a vice-chairman at the company, are now serving as its co-chief executives.
While Mr. Neumann’s investors were willing to entertain his eccentricities since co-founding WeWork in 2010, his free-wheeling ways and party-heavy lifestyle came into focus once he failed to get the company’s IPO under way.
During the attempts to woo IPO investors last month, Mr. Neumann was criticized by corporate governance experts for arrangements that went beyond the typical practice of having majority voting control through special categories of shares.
These included giving his estate a major say in his replacement as CEO, and tying the voting power of shares to how much he donated to charitable causes. Mr. Neumann had also entered into several transactions with WeWork, making the company a tenant in some of his properties and charging it rent.
Mr. Neumann, 40, is not the first founder of a major startup to be forced to step down recently. Uber Technologies Inc. co-founder Travis Kalanick resigned as CEO of the ride-hailing startup in 2017 after facing a rebellion from his board over a string of scandals, including allegations of enabling a chauvinistic and toxic work culture.”
“I view this as SoftBank’s moonshot to get WeWork back on all fours,” said Eric Talley, professor of law at Columbia Law School.
“They realize that Neumann’s continued involvement in the company would be a continued impediment to that.”