WeWork, formerly the most valuable US startup, declares bankruptcy under SoftBank ownership

WeWork, the once high-flying office space provider backed by SoftBank Group, filed for bankruptcy protection on Monday, 6 November 2023, marking a stark admission that its rapid rise and subsequent downfall have reshaped the global office sector.

The Japanese technology giant SoftBank, which owns approximately 60% of WeWork and invested billions in its revival, has now come to terms with the reality that the company's survival hinges on renegotiating its costly leases in the context of bankruptcy.

According to a WeWork spokesperson, a significant breakthrough was achieved as approximately 92% of the company's lenders agreed to convert their secured debt into equity under a restructuring support agreement. This move effectively wiped out around $3 billion of debt.

The company has also announced its intention to initiate recognition proceedings in Canada, ensuring that its financial liquidity remains intact to continue normal operations. Locations outside of the United States and Canada, along with its global franchisees, remain unaffected by these bankruptcy proceedings.

As of June 2023, WeWork maintained office space availability at 777 locations worldwide.

In a statement, SoftBank expressed confidence that WeWork's restructuring support agreement is the right step towards reorganizing the business and emerging from Chapter 11 proceedings. SoftBank reiterated its commitment to acting in the best long-term interests of its investors.

WeWork's shares have experienced a staggering decline of about 98.5% throughout the year, reflecting the company's ongoing struggle to achieve profitability. Expensive leases and corporate clients canceling contracts due to the growing trend of remote work have compounded the company's woes. In the second quarter of 2023, space costs consumed a whopping 74% of WeWork's revenue, according to the last financial results reported.

A bankruptcy filing with the New Jersey court disclosed that WeWork's assets stood at $15.06 billion, while liabilities amounted to $18.66 billion as of June 30, 2023.

"WeWork could use provisions of the U.S. bankruptcy code to rid itself of onerous leases," suggested law firm Cadwalader, Wickersham & Taft LLP in a note to landlords back in August. Many landlords are bracing for a significant impact.

"As part of today's filing, WeWork is requesting the ability to reject the leases of certain locations, which are largely nonoperational, and all affected members have received advanced notice," the company stated in its announcement.

WeWork's remarkable journey from a startup to the most valuable U.S. startup worth $47 billion under its founder, Adam Neumann, was characterized by investments from notable names like SoftBank, Benchmark, and JPMorgan Chase. However, Neumann's aggressive pursuit of growth at the expense of profits, along with his eccentric behavior, led to his ouster and the derailment of an initial public offering in 2019.

SoftBank found itself compelled to double down on its investment in WeWork, appointing real estate veteran Sandeep Mathrani as its CEO. In 2021, a deal was struck to take WeWork public through a merger with a blank-check acquisition company, valuing the company at $8 billion.

Despite successfully amending 590 leases and saving approximately $12.7 billion in fixed lease payments, WeWork could not overcome the challenges brought about by the COVID-19 pandemic, which forced office workers to stay home. Landlords, who were feeling the pressure themselves, were reluctant to adjust lease terms.

WeWork's customer base also dwindled as startups and smaller businesses cut spending in the face of rising inflation and economic uncertainty. The company further contended with competition from its own landlords, who began offering short and flexible leases to adapt to the changing dynamics of the office sector.

This year, David Tolley, a former investment banker and private equity executive, succeeded Mathrani as WeWork's CEO. Tolley, who previously served as the chief executive of Intelsat, played a pivotal role in helping the debt-stricken satellite communications provider emerge from bankruptcy in 2022.

Despite engaging in debt restructurings, WeWork's struggles persisted, ultimately leading to its bankruptcy filing. In the days leading up to the filing, Adam Neumann, the company's founder, expressed his belief that a reorganization would pave the way for WeWork's successful emergence from this challenging chapter.

WeWork's journey continues to be a compelling narrative, highlighting the ever-evolving nature of the modern office landscape and the enduring influence of SoftBank in the world of technology and innovation.