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SoftBank's break-even valuation for WeWork seen at $24bn

Drop-off from $47bn signals major blow to Japanese investor

A sign outside a WeWork shared office in New York City.   © Reuters

TOKYO -- The extent of SoftBank Group's exposure to the recent woes at WeWork is the talk of the town, as the U.S. office-sharing startup said Monday that it will officially scrap an initial public offering planned for this month.

SoftBank has pledged to pour over $10 billion into WeWork and its affiliates through infusions directly from the company or from the SoftBank Vision Fund, according to filings released by WeWork parent We Co.

SoftBank's direct investment into WeWork looks to be around $7.5 billion, when excluding the $1.5 billion to be executed next year under a warrant agreement, and the $1.6 billion that has gone to WeWork's overseas subsidiaries, such as units in Japan and China.

Judging from SoftBank's multiple investments and its holdings in WeWork, the break-even point for the Japanese tech conglomerate's investment would be a valuation of around $24 billion for the startup.

That means that if the valuation had stayed at $47 billion, as reported in January, SoftBank was set for a major windfall. With the valuation slipping significantly below $20 billion, as it is perceived in the market today, the investment would lose money in a big way.

Chris Lane, senior analyst at New York brokerage Sanford C. Bernstein, calculates that SoftBank and the Vision Fund stand to incur $1.3 billion in paper losses if WeWork's valuation is $20 billion. That breaks down to a loss of $600 million for SoftBank and $700 million for the Vision Fund.

If WeWork's value were to fall to $15 billion, the unrealized loss swells to $3.8 billion.

Hypothetically, a drop from a $47 billion valuation to a $15 billion valuation would mean a reversal from a $7 billion paper profit to a $3.8 billion paper loss -- a net $11 billion difference.

How this reflects on SoftBank's earnings report is not entirely clear. The company usually first books the entirety of the Vision Fund's profit or loss in group operating earnings, then factors in the gains or losses attributable to outside investors.

If WeWork was valued at $47 billion during the April-June quarter, then downgraded to $15 billion in the next quarter, that would translate to a pretax hit for SoftBank of more than $5 billion.

SoftBank has not disclosed those relevant details in its earnings reports. WeWork's valuation in the July-September quarter holds particular interest in the equity market, but it will not be understood without SoftBank's disclosure.

WeWork's new Co-CEOs Artie Minson and Sebastian Gunningham said Monday that the company is postponing the public offering to "focus on our core business, the fundamentals of which remain strong."

"We have every intention to operate WeWork as a public company and look forward to revisiting the public equity markets in the future," the two said in a statement.

We Co.'s prospectus shows that it hemorrhaged $1.93 billion last year on revenue of $1.82 billion, leaving its year-end cash position at $1.74 billion.

WeWork, was losing money 25% faster in the first half of 2019 than in the same period a year earlier. Although its cash was boosted to $2.47 billion as of the end of June, largely thanks to a $2 billion funding round led by SoftBank in January, a pulled IPO means WeWork would either have to raise funds from other channels -- likely again from Vision Fund, according to reports -- or improve operations drastically, if it wants to maintain a healthy cash flow.

SoftBank owes its healthy earnings to the paper profit generated by its investment targets. In April-June, over 600 billion yen ($5.6 billion) in valuation profit came from unlisted success stories such as Indian hotel operator Oyo and the American food delivery service DoorDash. The windfall easily offset losses that approached 200 billion yen, much of it tied to Uber Technologies and its failure to gain traction in the stock market after its IPO.

For the quarter ended in September, however, SoftBank may have hit a bump in its winning streak. Share prices of several of the targets have fallen off. Slack Technologies, the business chat provider, was down 40% from its stock debut as of Friday. Uber was down 30%.

Five Vision Fund targets that listed by the end of June had lost over $4 billion in combined market value, data from QUICK Factset shows. The stock price of Alibaba Group Holding, SoftBank's largest investment target at over 40% of the portfolio, slipped 2% during July-September. That leaves unrealized profit at unlisted investment targets to fill in the gap.

Because SoftBank holds roughly 27 trillion yen worth of equities, a 500 billion yen loss due to WeWork would amount to a drop in the bucket in financial terms, said a source at a Japanese brokerage. Some businesses are faring well, such as telecom unit SoftBank Corp., whose stock price rose 6% during the three months through September.

Yet SoftBank Group still faces doubts about its investment strategy. After touching a roughly eight-month low, the stock closed down 3% Monday at 4,240 yen.

The group's own market value dipped below 9 trillion yen. That is less than half the difference between its 27 trillion yen worth of equity holdings and the group's standalone net liabilities.

Sparking the SoftBank sell-off was Alibaba's sudden drop in New York trading Friday. Bloomberg News reported Friday that U.S. President Donald Trump was considering investment limits on Chinese securities.

One option being considered by the Trump administration is delisting Chinese shares, something the U.S. Treasury Department denied. "The administration is not contemplating blocking Chinese companies from listing shares on U.S. stock exchanges at this time," department spokeswoman Monica Crowley said in a statement Saturday.

Despite the administration's attempts to put out the flames, Chinese enterprises looking to list in the U.S. have been under fire for a lack of transparency. The topic could linger as a contributor to the tensions between Washington and Beijing.

Nikkei staff writer Alex Fang in New York contributed to this article.

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