SoftBank-backed WeWork files for bankruptcy as its real estate gamble sours

SoftBank Group’s WeWork has filed for bankruptcy due to its unsuccessful bet on companies embracing office-sharing space. The move is an acknowledgment by SoftBank, which owns roughly 60 per cent of WeWork, and has poured billions into its revival, that the company's survival hinges on renegotiating costly leases through bankruptcy proceedings.

WeWork has grappled with persistent profitability challenges, mainly driven by its expensive lease agreements and corporate clients cancelling subscriptions as more employees adopted remote work. In the second quarter of 2023, lease expenses consumed a significant 74 per cent of WeWork's revenue.

The bankruptcy filing reveals estimated assets and liabilities ranging from $10 billion to $50 billion, casting a shadow on the future of the coworking giant.

Law firm Cadwalader, Wickersham & Taft LLP had earlier suggested that WeWork could employ provisions of the US bankruptcy code to shed burdensome leases, leaving some landlords anticipating substantial impacts.

Founded by Adam Neumann, WeWork once soared to become the most valuable US startup, boasting a $47 billion valuation. It secured investments from prominent players, including SoftBank, venture capital firm Benchmark, and the support of major Wall Street banks like JPMorgan Chase. However, Neumann's pursuit of rapid expansion at the expense of profitability and revelations about his unconventional behaviour led to his removal and the derailment of WeWork's 2019 initial public offering.

SoftBank had to double down on its investment in WeWork and appointed real estate veteran Sandeep Mathrani as the startup's CEO. In 2021, SoftBank orchestrated WeWork's public debut through a merger with a special-purpose acquisition company, valuing it at $8 billion.

WeWork managed to renegotiate 590 leases, saving approximately $12.7 billion in fixed lease payments. Yet, the adverse effects of the COVID-19 pandemic, which kept office workers at home, proved insurmountable. Many landlords, also grappling with difficulties, were reluctant to offer lease concessions to WeWork.

In addition to these challenges, WeWork faced competition from its own landlords, who began offering short and flexible lease options to adapt to the changing office landscape.

WeWork's CEO leadership changed hands several times, with David Tolley taking over from Sandeep Mathrani in 2023. Tolley, a former investment banker and private equity executive known for his role in helping the debt-stricken satellite communications provider Intelsat emerge from bankruptcy in 2022, couldn't prevent WeWork's bankruptcy despite debt restructuring efforts.

Last week, WeWork secured a seven-day extension from its creditors on an interest payment, granting the company more time to negotiate with them.

(With Reuters Inputs)