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SoftBank's WeWork bailout risks US$38B Vision Fund 2 pledge

SoftBank Group Corp.'s decision to invest approximately US$9.5 billion in WeWork Cos. Inc. could make sticking to its US$38 billion Vision Fund 2 pledge much harder, analysts said.

The Japanese company announced Oct. 22 a funding package that includes an up to US$3 billion tender offer and additional investment of US$5 billion in WeWork. It also agreed to expedite an existing US$1.5 billion funding commitment to WeWork to increase liquidity. The deal gives SoftBank 80% ownership, but not control of the board or majority voting rights.

The bailout package "throws a spanner in the works" for SoftBank by making it "even more difficult" for the company to fulfill its US$38 billion investment commitment for Vision Fund 2, said Arun George, IPO, M&A and TMT analyst at Global Equity Research.

The WeWork bailout package will make it harder to gain board approval for the US$38 billion commitment, Hatem Dhiab, managing partner at wealth and investment management firm Gerber Kawasaki said. The board could cite the company's 20%-plus stock drop in the last six months. SoftBank may no longer be willing to honor its commitment, Dhiab said.

SoftBank plans to tap the debt market for WeWork's rescue deal. While it is important to lift investor sentiment and avoid a WeWork bankruptcy, George and Dhiab said it is not advisable for SoftBank to take out any more debt until they deleverage from the WeWork investment.

"I think it's reckless to use debt. Additionally, I'm not sure why anybody would buy WeWork debt, they have some serious challenges ahead especially if the economy keeps slowing down," Dhiab said.

SoftBank announced the new Vision Fund in July, listing Apple Inc., Microsoft Corp., Foxconn Technology Group Co. Ltd., Mizuho Bank, Standard Chartered Bank and the Kazakhstan sovereign wealth fund among expected investors. The fund generated about US$108 billion in pledges including SoftBank's.

WeWork's spiraling valuation and shelved IPO is not the only reason for Vision Fund 2 caution. The poor IPO performances of SoftBank-backed Uber Technologies Inc. and Slack Technologies Inc. also make it difficult for SoftBank to stick to its pledge, as previously reported.

SoftBank will likely stagger payments to Vision Fund 2 and aim for more gradual growth, George said.

WeWork is reportedly planning to slash 30% of its global workforce, and pull back from China, India and most of Latin America among other regions.

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