The Daily Telegraph - 16.08.2019

The Daily Telegraph Friday 16 August 2019 *** 33

I

t is not every day that a

corporate document filed with

financial regulators begins with

a sentence like: “We dedicate

this to the energy of we –

greater than any one of us but

inside each of us.”

Still, that is how WeWork,

the growing office rental

company, began the official prospectus

for its hotly anticipated public float

later this year. The company has grown

from a single New York office in 2010 to

528 locations in 111 cities at the end of

the first half of this year. It was most

recently valued at $47bn (£38bn).

There is just one snag: WeWork also

lost almost $905m in the first six

months of this year alone and shows no

sign of being profitable soon.

So far, so Silicon Valley. Wall Street is

now used to dealing with “unicorns” –

privately held companies valued at

more than $1bn – which grow quickly

but burn cash even quicker.

But WeWork, with its unusual

corporate structure, its eccentric but

controlling founder, its murky path to

sustainable income and its cash

injections from the Japanese

investment giant SoftBank, may be

the platonic ideal of questionable

mega-unicorns.

At the heart of WeWork’s future and

its valuation is a simple financial puzzle:

how can what appears to be a real

estate company be valued like a tech

company? Its prospectus works hard to

answer that question, using some form

of the word “tech” 123 times. But,

ominously, there is nothing in the meat

of the paperwork that decisively clears

up the mystery.

WeWork’s growth is impressive.

According to its prospectus, between

June 2018 and June 2019, its

membership grew by 97pc and its

revenue grew by 101pc. Its losses also

ballooned, but by far less – just 25pc –

indicating that its revenue is at least

beginning to catch up with its

expenditure.

The company claims that its data-

driven expertise lets it create new

working space at $7,300 per member

employee rather than the standard

$21,600. Moreover, its share of

members who have more than 500

employees has risen to 40pc.

But the most important clue to the

puzzle of WeWork might not be in the

company’s paperwork at all. Instead, it

might lie in the travails of Regus, a

comparatively venerable British office

rental firm whose business model, on

the surface, looks identical.

Regus was founded in 1989 by an

English businessman, Mark Dixon, who

was frustrated at the lack of flexible

office space available for travelling

entrepreneurs.

Both Regus and WeWork engage in

straightforward rent arbitrage. They

take out long leases on floors in

buildings in good locations, slice up

those floors into smaller packages of

office space and parcel them out at a

premium to short-term tenants.

The problem is that Regus’s parent

company, IWG, is valued at somewhere

around £2.5bn. So what does WeWork

have that Regus doesn’t?

According to Tom Smith, founder of

the online office space marketplace

Truss, one answer is that WeWork’s

very name is now a well-known

byword for the service it offers. “Its

name has become ubiquitous with

co-working,” he says. “A lot of the

uninitiated have no idea how many

other options they have.” But it’s hard

to see how simply being better known

and better decorated than the

this approach. WeWork executives

have compared the company to

Amazon, which uses its retail business

to fuel numerous other services.

WeWork locations could

algorithmically match members with

potential business contacts, draw on

data to maximise retention through

cleverly pitched events, ruthlessly

optimise the use of conference rooms

and floor space, even remember

members’ preferences and

automatically adjust the climate or the

height of their desk when they visit a

location abroad.

“The hardware and software that

WeWork has created and acquired

throughout the years separates it from

many of the other co-working

providers,” says Ash Zandieh, chief

intelligence officer of CREtech, an

analysis firm specialising in real estate

technology, who is optimistic about

WeWork’s future.

There is, however, a big, heavy

concrete stumbling block in the way of

those ambitions – 528 of them, to be

precise. WeWork is nothing without its

buildings, and unlike a traditional tech

company it cannot grow without

renting more of them.

“In a software company, once the

software is made, you could just beam

it out into the universe ad infinitum at

no extra cost,” says Alex Snyder, a

senior analyst at the real estate asset

manager Centre Square. Calum

Battersby, market analyst at Berenberg

bank, agrees: “It’s not scalable like a

tech or software company.”

Indeed, Snyder calculates that in

Company’s name has

become synonymous

with co-working, but

can that justify its

$47bn valuation?

By Laurence Dodds

in San Francisco

TAMAS TOMCSENKO FOR THE TELEGRAPH

competition can translate to 10 times

the value.

“Competition is coming from all

flanks, from start-ups to large

institutional landlords,” says Smith. He

has seen a 30pc increase in people

seeking flexible space in the last year

alone, and the number of providers on

his service has gone from 69 to 256 in

the same time.

In other words, neither WeWork’s

undoubtedly strong brand nor its

aesthetic skills actually give it a “moat”

• Warren Buffett’s term for a unique
  selling point that would be
  prohibitively difficult for a company’s
  competitors to simply copy.
  WeWork, however, claims to have a
  secret weapon. Its buildings, it argues,
  are not just buildings; they are a “global
  physical platform” for a whole suite of
  services, from nurseries to schools to
  community events to residential
  dormitories. There is a precedent for

Alibaba defies expectations

with 42pc boost in revenues

By Hasan Chowdhury

ALIBABA’S revenues surged in the last

quarter as the Chinese e-commerce gi-

ant defied analyst expectations and

fears of a slowdown in China’s econ-

omy.

The company posted a 42pc boost in

revenue yesterday for the three months

to June, as its e-commerce and cloud

computing businesses drove earnings

to 114.9bn yuan ($16.3bn) from 80.9bn

yuan in the same quarter last year.

The company’s shares climbed 3.3pc

in pre-market trading as its core retail

services, Tmall and Taobao, delivered a

44pc year-on-year increase in revenue,

buoyed by increasing adoption of

smartphones in the country and fea-

tures such as personalised recommen-

dations for shoppers. Its food delivery

business, Ele.me, proved particularly

popular, as revenue grew 137pc from

the previous year.

Revenue in its cloud computing ven-

ture saw a sharp 66pc rise to 7.8bn

yuan. The company expanded its cloud

computing arm to the UK last year,

launching data centres in London to

meet rising demands and prepare rival

services to those of Silicon Valley firms

Amazon and Microsoft.

China has been under pressure in re-

cent months as the ongoing trade war

with the US has started to affect its eco-

nomic outlook following tit-for-tat tar-

iffs between the two countries.

But the figures from Alibaba indicate

concerns have had little impact on con-

sumer confidence, as the number of

consumers actively using its e-com-

merce services rose by 20m to 674m in

the 12 months to the end of March.

The results come as Daniel Zhang,

who assumed the role of chief execu-

tive at Alibaba in 2015, is set to take on

the additional role of chairman next

month – a position currently held by

the company’s founder Jack Ma.

Mr Zhang was the architect of Sin-

gles’ Day, an annual, one-day shopping

event which drew in $30.6bn in reve-

nue in 2018. All eyes will be on Aliba-

ba’s chief ahead of this year’s event, as

geopolitical uncertainties place pres-

sure on global growth and yet threaten

to waver consumer demand.

“This is both a challenge and oppor-

tunity for the Chinese economy,” Mr

Zhang said on the earnings call.

US blacklists Chinese firm

involved with Hinkley Point

By James Cook

THE Government faces renewed ques-

tions over its decision to allow a state-

owned Chinese firm to be involved in

the UK’s power generation programme

after the business was placed on a US

export blacklist.

China General Nuclear Power Group

(CGN), which has partnered with EDF

to help fund a third of the £20bn cost of

the nuclear power station at Hinkley

Point, was yesterday added to the  US

commerce department’s so-called “en-

tity list”.

The move effectively blocks Ameri-

can firms from selling products and

services to the company  without writ-

ten approval.

In 2016, the US government accused

CGN of engaging in espionage as far

back as the Nineties in order to steal

US technology.

Executives from the firm have de-

nied any wrongdoing.

The decision adds  “political dynam-

ics” around Hinkley Point’s Chinese

backing, according to  Malcolm Tay-

lor,  the director of cybersecurity at

ITC  Secure and a former GCHQ

officer.

“If you want to be a global player

and  trade globally, you are inevitably

going to come into very close contact

with countries who aren’t immedi-

ately  intrinsically friendly,” he said.

“The UK has made a big play of trading

with China.”

Antony Froggatt, a senior research

fellow at Chatham House, added:

“There’s a high level political narra-

tive  around [CGN’s involvement].

There are many questions around

Hinkley in terms of its economics, in

terms of the problems that EDF and

Arriva the builder have had. This may

add to some of that discussion of how

to proceed.”

The Government approved plans to

build the new nuclear plant in 2016

after it reviewed a deal that allowed

CGN to fund a third  of the project in

return for the chance to build its own

reactor at Bradwell in Essex.

Spokesmen for the Government and

EDF did not respond to requests for

comment.

The commerce department added

Huawei, a  Chinese telecoms company,

to  the same list in May in a move

that  escalated the US trade dispute

with China.

Chain male Tiffany & Co is launching a collection for

men in October as the upscale jeweller taps into a trend

popularised by the likes of Jay-Z and John Mayer.

AP

order for WeWork to justify its current

valuation, it would need to draw in

about twice as many memberships as it

already has and monetise them at a

30pc profit margin. That would create

about $2bn in profit each year, on

around $7bn in revenue.

There are also many concerns about

WeWork’s founder, Adam Neumann.

He is charismatic and optimistic, a

party animal who arrives at company

“summer camps” by helicopter.

He believes WeWork is riding a huge

social change, powered by a “We

Generation” who value community

more than ownership. He has banned

employees from claiming expenses for

meat. He has even declared that

“WeWork Mars is in our pipeline”.

But Neumann himself owns quite a

lot of property, or at least shares in

property – and he appears to be

channelling company money into it.

WeWork says there is no conflict of

interest because these properties are

managed by its own real estate arm,

Ark Capital. Still, the arrangement

reportedly raised eyebrows among

WeWork’s investors. Neumann’s family

are also closely involved in the

company: his wife Rebekah is one of a

handful of people authorised to pick his

successor if he dies, while two other

relatives have done work for it.

“From an investor standpoint he

seems to carry a lot of red flags for a

potential public chief executive,” says

David Erickson, a lecturer at the

Wharton School of business who

managed big public floats for Barclays

Bank. “That sounds to me like a

conflict of interest ... just because he’s a

great visionary and a builder of

business, it doesn’t mean he makes the

best chief executive.”

Ultimately, all of these factors

suggest a rocky path ahead for

WeWork. If it cannot live up to its

valuation, it will need to be written

down before its public float, which

could come as early as September.

Failing that, it could suffer a

humiliating fall in share price, perhaps

worse than that suffered by Uber.

Adam Neumann,

founder of WeWork,

believes the

company is

powered by a ‘We

Generation’ who

put community

above ownership

‘The hardware and

software that WeWork has

created and acquired

separates it from peers’

123

Number of times

the word ‘tech’ was

used in WeWork’s

prospectus for its

anticipated float

Technology Intelligence

WeWork’s convoluted

float prospectus, which

landed on Wednesday,

revealed huge losses

and rapid growth as it

plans for its market

debut next month.

But it also revealed

fascinating details

including the bizarre

status of its founder

Adam Neumann, the

role of his wife (who is

also a cousin of

Gwyneth Paltrow) and

its plans to open

private schools. Here

are 10 things that

caught our eye:

‘The energy of We’

The document contains

a strange message just

two pages in: “We

dedicate this to the

energy of we – greater

than any of us, but

inside each of us.”

The language was

mocked on Twitter,

with one user writing:

“Three sentences into

WeWork’s ‘our story’

section of its IPO filings

and I have no idea what

it does.”

Neumann’s status as

ultimate leader

WeWork’s description

of Neumann, its

co-founder, stops short

of claiming he can walk

on water, but only just:

“Adam is a unique

leader who has proven

he can wear the hats of

visionary, operator and

innovator, while

thriving as a

community and culture

creator,” it says.

It has a byzantine

ownership structure

This makes it hard to

know exactly what

shareholders will be

owning. At the top is

The We Company,

which investors will

buy into, underneath is

The We Company MC,

We Company

Partnership and

various WeWork

companies and

overseas holdings and

an Ark property arm.

WeWork gave its

founder loans as it

paid him rent

Neumann owns a

number of properties

the company lets out,

which WeWork admits

could be a “conflict of

interest”. Despite this,

WeWork made cash

payments to landlord

entities affiliated with

Neumann of $4.2m; it

also gave him loans.

It may never make any

money

WeWork says that it

may be “unable to

achieve profitability at

a company level for the

foreseeable future”.

WeWork does not

employ its chief

WeWork’s filing says

the company has “no

employment

agreement in place

with Adam”, raising the

spectre that the boss

could simply walk at

any time if he grows

tired of the company or

pursues one of his

many other interests,

such as surfing.

Its founder’s wife gets

to pick his successor

If Neumann dies, his

wife will play a key role

in choosing a successor.

Rebekah Neumann will

be part of a two or

three person selection

committee with other

board members.

It has plans to open its

own private schools

It says such schools

will be “focused on

supporting the growth

of children’s minds,

bodies and souls

through an integrated

curriculum”, adding

that education “should

not be limited to

traditional options”.

Adam and Rebekah

have to give $1bn to

charity or lose half

their voting rights

WeWork’s husband

and wife co-founders

are so dedicated to

giving $1bn to charity

that they’ve introduced

an agreement in the

company’s filing that

will halve the voting

power of the company’s

highest voting shares if

they fail to donate $1bn

within 10 years.

We is a tech company

WeWork wants you to

know it is not just a

company loaning out

office space or a boring

old property developer.

It is all about the tech,

that does something,

somewhere, it says.

WeWork i n p r o g r e s s Ten bizarre snippets from its listing prospectus

WeWork talks up tech credentials ahead of float

$30.6bn

The amount Alibaba raised in its Singles’

Day, an annual one-day shopping event

instigated by its chief Daniel Zhang

‘There’s a high level political

narrative around CGN’s

involvement. There are

many questions’

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