Breakingviews: WeWork needs an Adam Neumann, not the Adam Neumann

Adam Neumann knows three things. He knows how to encourage investors to value a company at a ridiculous price. He knows how to get himself paid. He also, having founded the now-bankrupt WeWork, knows something about office real estate. Neumann wants his new investment firm to buy his former brainchild out of restructuring and is irritated WeWork’s new managers aren’t giving him a chance, according to a letter published by the New York Times on Tuesday. WeWork’s new guard could perhaps use a believer like Neumann. It just can’t be Neumann.

The company, once valued at $47 billion, is a prime example of how low interest rate-fueled exuberance got carried away. Neumann tapped funders including SoftBank Group who, in the late 2010s, were competing for high growth and huge returns. He convinced investors to pump up WeWork’s value just before the office market seized up. As the company’s cash burn couldn’t keep up with its debt payments, disturbing stories emerged. Among other things, Neumann owned stakes in buildings leased by WeWork. The company agreed to part ways but paid him a very large sum for the privilege.

WeWork filed for Chapter 11 in November. In his letter, Neumann says advances to WeWork have not been welcomed. He even invoked hedge fund kingpin Dan Loeb’s name, saying that he is partnering with reputable firms. Loeb’s fund, for its part, may not be as interested as the letter claims, according to Reuters.

There’s a case for investing in a company like WeWork at the right price. Commercial real estate valuations have crashed – shares of Vornado Realty Trust, one of the largest U.S. office owners, are down almost two-thirds in five years – suggesting firms like WeWork might be cheap. Landlords are willing to sign long-term leases at lower prices to get people through the door. Companies prefer to pay up for short-term flexibility. WeWork sublets for a spread between the two, creating a sweet spot. Indeed IWG, the Swiss-based rival of WeWork, is expected to post record revenue this year thanks to “structural growth.”

Yet WeWork’s heady days are an overhang. Lenders agreed to convert roughly $3 billion of secured debt into equity. However, it still had over $13 billion of long-term leases. Without a massive renegotiation, it’s hard to see how any buyer could make everyone whole. Assume WeWork’s revenue this year is $3.4 billion, roughly its pace prior to bankruptcy. On IWG’s multiple, at 0.7 times revenue, it would be worth about $2.5 billion.

WeWork needs someone who is willing to capitalize the business at a valuation that is far too high. Unfortunately Neumann has burned outside investors once. It can’t be built back up from the ground with him.