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The We Co. IPO hinging on 'sense of community' premium

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IWG's Regus London Bridge The News Building property in London.
Source: IWG

No matter how The We Co.'s initial public offering ultimately is priced, the company's valuation and performance in the market in the near term will likely defy some expectations.

Since the beginning of the year, when a round of private funding from Japan's SoftBank Group Corp. gave the company, parent to WeWork Cos. Inc., a $47 billion valuation, market observers have debated how a company so young and so unprofitable it reported a $1.93 billion net loss in 2018 on $1.82 billion in revenue — could achieve such a high figure. WeWork is the dominant player in the coworking space in the U.S., and its success has driven its evolution into a total lifestyle brand with co-living, gym and education components. But IWG PLC, a close European competitor, has a larger footprint and solid ancillary revenue streams, is actually profitable, and has an equity market capitalization of just $4.65 billion.

"There's a lot of controversy and divergence of opinion [about pricing]," Jay Ritter, a professor and expert on IPOs at the University of Florida's business school, said of the planned We Co. offering. "Is this a tech company that deserves tech multiples? Or is it a real estate company that deserves real estate multiples?"

The We Co. IPO is expected to launch sometime this fall. In an interview, Ritter deemed IWG to be the best corporate comparison, insofar as its coworking business is "pretty close to identical" to that of WeWork. IWG — which runs the coworking brands Regus and Spaces and was reported by Sky News recently to be considering spinning off its U.S. business — has more than 3,300 locations in more than 110 countries. WeWork, meanwhile, operates a little more than 800 locations across 37 countries.

"If people were talking about a $23 billion valuation instead of a $47 billion valuation, people would still be asking, why is this company being valued so much higher than IWG?" he said.

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Others share Ritter's view. Scott Galloway, an author, entrepreneur and professor at New York University's business school who has been highly critical of The We Co. IPO, said IWG's valuation is a "perfect benchmark."

"Any analyst supporting any valuation anything more than $10 billion is effectively setting themselves up to be banned from the industry at some point, because there is no way you can justify anything that resembles the $47 billion valuation," he said.

WeWork declined to comment for this story. The company's champions point to the intangible value of the WeWork brand and community network, as described in the prospectus. The We Co. aims to be not merely a landlord but a lifestyle; its spaces and services foster a "culture of inclusivity" and an "inspired community" that will "elevate how people work, live and grow," according to the filing.

"We have built a worldwide platform that supports growth, shared experiences and true success," the filing states.

Andrew Shepherd-Barron, equity analyst at Peel Hunt, described IWG as a more established player in the coworking space that has done a superior job generating ancillary revenues, but he noted WeWork's success in creating a "sense of community" among its members.

"WeWork is definitely trying to, and has been quite successful at, creating a community aspect to it all," Shepherd said. "If you can create a community aspect, you could be able to charge a higher price for the same thing and/or have less churn both of which would be nicely profitable things to do."

Ritter, the University of Florida professor, said the $47 billion valuation in headlines is likely an overestimate typical of "unicorn" IPOs, where early-round investors receive not common stock, but convertible preferred stock with some form of downside protection. For example, the investor may be contractually entitled to additional shares if the IPO prices below what they paid per share. The $47 billion valuation reflects the value of those higher-value shares with benefits, not the value of common shares.

Ritter noted that WeWork's current lack of profitability may not be much of a speed bump in the public market in the end. The number of unprofitable companies executing IPOs has been on the rise for years, he said.

"VCs, private investors and public markets are telling these companies, 'We want growth. We don't want you to be focused on short-term profitability. Ideally it's profitable growth, but we're willing to put up with losses as long as there's a plausible story that the growth is going to result in big future profits,'" he said.

The performance of unprofitable IPOs has varied widely, but Ritter deemed The We Co. IPO high-risk overall.

"The higher the valuation, the bigger the downside potential," he said.