WeWork Still Needs Cash After Pulling IPO - WSJ

For years, WeWork’s parent company was defined by big spending as it relentlessly pursued rapid growth.

On Monday, We Co. said it would file a request with the Securities and Exchange Commission to withdraw its IPO proposal. The company said it is postponing the offering to focus on its core business and that it has “every intention to operate WeWork as a public company” but didn’t provide a time frame.

To cut costs, the company’s new co-CEOs, Sebastian Gunningham and Artie Minson, are planning thousands of job cuts, putting extraneous businesses up for sale and purging some luxuries from the previous CEO, such as a G650ER jet purchased for more than $60 million last year, people familiar with the matter have said.

New York-based We had $2.5 billion in cash as of June 30. At the current rate of cash burn—about $700 million a quarter—it would run out of money some time after the first quarter of 2020, according to Chris Lane, an analyst at Sanford C. Bernstein & Co. Mr. Lane and his colleagues projected in a recent note to clients that We would burn through nearly $10 billion in cash between 2019 and 2022, assuming it keeps growing.

Messrs. Gunningham and Minson said in a joint email to We staff last week that they “anticipate difficult decisions ahead.”

“As we look toward a future IPO, we will closely review all aspects of our company with the intention of strengthening our core business and improving our management and operations,” the co-CEOs wrote.

Further adding pressure are agreements We made in a bond offering last year for which it must keep at least $500 million of cash, according to S&P Global Ratings, which downgraded We’s bonds last week.

The company, which provides shared workspaces, had expected a huge infusion of cash in a public offering. But skepticism from prospective public market investors helped lead to the IPO’s delay and the subsequent replacement of Mr. Neumann with two of his former deputies, and now investors don’t foresee an IPO until next year. The company is in early talks to raise money from private investors, people familiar with those discussions have said.

The sudden desire to execute cuts contrasts with the picture long painted by Mr. Neumann and other We executives, including Mr. Minson, who stressed that the company had plenty of cash and that losses were nothing to worry about.

Subsequent to the company’s founding in 2010, the internal mantra was that the large losses were the result of We’s rapid growth. Because so much of the money was going to new locations, if the business stopped expanding it could be profitable, Mr. Neumann would tell staff.

But the scale of its losses, even for a fast-growing co-working company, has perplexed rivals and others in the real-estate sector. Taken with the cuts, analysts say, it suggests problems extend beyond Mr. Neumann to the underlying health and strategy of the business.

“Something is wrong,” said Nori Gerardo Lietz, a lecturer on real estate and venture capital at Harvard Business School who recently published an analysis of the company. “They’re not managing their growth—they’re spending money like drunken sailors,” and their general and administrative costs are growing too fast, she said.

Ms. Lietz said the disclosures in We’s IPO prospectus don’t adequately explain the problems at the root of the large losses, which totaled more than $1.6 billion in 2018.

A danger for We in cutting costs is that the moves would drag down its growth rates. The company has doubled its revenue most every year—a quality it long hoped investors would focus on. With slower growth, investors say they would need to see a clear road to profitability.

No matter the growth rate, the business is expected to need lots of cash to build out its offices. We reported spending $1.3 billion in net capital costs in 2018—only a portion of which shows up in the company’s official losses because those costs are accounted for over many years.

Without more disclosure from We or its co-working rivals, many of which are private, it is difficult to make exact comparisons with other firms and their profitability. Still, in the past some comparable companies lost far less despite strong growth.

In 1998 and 1999, IWG PLC—then known as Regus—positioned itself as a breakout company remaking the office market with its short-term leases and services for tenants. With its revenue doubling in 1999, it lost £17.9 million ($28.9 million), or 16% of revenue. Annual revenue at HQ Global Holdings—the largest serviced-office company in the U.S. at the time—more than doubled in 2000 to $455 million, on which it posted losses of $20.5 million.

In comparison, We’s 2018 loss of $1.6 billion was on revenue of $1.8 billion.

Both IWG and HQ Global had a similar basic model, but also made money charging for add-ons like phones and printers. IWG acquired HQ Global in 2004.

Write to Eliot Brown at eliot.brown@wsj.com

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