Thanks to the SPAC Boom, Even WeWork is Going Public
By Mohit Oberoi, CFAMar. 26 2021, Published 9:54 a.m. ET
WeWork has announced a reverse merger with the special purpose acquisition company BowX Acquisition Corp. (BOWX). WeWork was planning for an IPO in 2019 but later dropped the plans. The BOWX SPAC stock was trading higher in early trading on Mar. 26 on news of the merger. Should you buy BOWX stock before it merges with WeWork, or stay away from the SPAC for now?
There has been a widespread sell-off in SPACs or blank cheque companies. Markets are now getting apprehensive over these companies amid concerns of a bubble. Only about a month back, we saw a spike in SPAC stocks amid several announcing they had made deals with prominent merger targets. However, BOWX was up only about 5 percent in early trade on Mar. 26.
WeWork to reverse merge with BOWX SPAC and go public
Along with the general pessimism towards SPACs, the reaction to the WeWork BOWX merger has plenty to do with the choice of WeWork as a merger target. When it was planning for an IPO in 2019, WeWork was looking at a valuation above $45 billion. However, after corporate governance issues cropped up at the company, it put the IPO on hold.
However, given its cash burn, WeWork was soon out scouting for cash. SoftBank, which was among the company’s shareholders, bailed out the company but at a toned-down valuation of $8 billion which was not even a fifth of what WeWork was targeting in the IPO.
Details of WeWork BOWX merger
The reverse merger with BOWX values WeWork at a proforma equity value of $7.9 billion and a proforma EV (enterprise value) of almost $9 billion. The valuation is similar to what the company was valued at the funding from SoftBank in 2019.
Thanks to the way SPAC reverse mergers are structured, the target companies can provide generous financial forecasts which they are barred from in the traditional IPO. No wonder there has been a wave of SPACs over the last year.
Looking at the forecasts provided by WeWork, which look very aggressive to say the least, it expects to become adjusted EBITDA positive by the fourth quarter of 2021. To put that in perspective, its adjusted EBITDA margin was -70 percent (yes you read it right!) in Q4 2020.
The company expects its total physical occupancy levels to improve from 47 percent to 75 percent between Q4 2020 to Q4 2021. It is forecasting the total occupancy levels to improve to 95 percent by the end of 2024.
WeWork expects its EBITDA margins to keep expanding and reach 29 percent by the end of 2024. In absolute terms, it would mean an adjusted EBITDA of $2 billion, up from an EBITDA loss of $1.8 billion in 2020. These numbers exclude the China operations where WeWork sold a majority stake to Trustbridge Partners for $200 million.
Should you buy BOWX stock before the WeWork merger
Based on the rosy forecasts provided by BOWX, the merger values WeWork at a 2022 EV-to-revenue multiple of 2.0x and a 2023 EV-EBITDA multiple of 6.6x. The multiples look reasonable if you are willing to accept the forecasts that WeWork has provided.
Meanwhile, for WeWork, more than the listing, the reverse merger would be yet another lifeline as it will receive $1.28 billion from the transaction including a PIPE (private investment in public equity) of $800 million.
All said, given WeWork’s weak financials and the still uncertain economic environment, BOWX SPAC stocks do not look like a buy. It could be a different ballgame for office space sharing companies like WeWork in a post COVID-19 world. Several other SPACs have tumbled amid the sell-off and could offer better value than BOWX.
