WeWork, a startup once valued at $47 billion and heavily backed by SoftBank, has filed for bankruptcy protection in the United States. This move signifies that WeWork's efforts to provide shared office space have faltered, and it's unable to sustain its expensive lease agreements without bankruptcy intervention. SoftBank, a major investor owning about 60% of WeWork, has acknowledged that WeWork's survival depends on renegotiating these costly leases.

WeWork's struggle for profitability is largely due to its costly lease agreements and the shift in corporate work culture, with more employees working from home. In the second quarter of 2023, paying for office space consumed a substantial 74% of WeWork's revenue. The company's bankruptcy filing indicates estimated assets and liabilities ranging from $10 billion to $50 billion, highlighting the magnitude of its financial challenges.

WeWork may seek relief from its burdensome leases using provisions of the US bankruptcy code. This situation could have significant implications for landlords who are now preparing for possible disruptions.

WeWork, under its founder Adam Neumann, had experienced rapid growth and reached the status of the most valuable U.S. startup, with a valuation of $47 billion. It attracted investments from prominent investors such as SoftBank, Benchmark, and major Wall Street banks like JPMorgan Chase. However, Neumann's focus on rapid expansion at the expense of profits and his eccentric behavior led to his removal, and WeWork's initial public offering plans in 2019 were derailed.

Bankruptcy

SoftBank was compelled to increase its investment in WeWork and appointed real estate veteran Sandeep Mathrani as the CEO. In 2021, SoftBank arranged a deal to take WeWork public through a merger with a special-purpose acquisition company (SPAC) at an $8 billion valuation. While WeWork managed to amend 590 leases, saving approximately $12.7 billion in fixed lease payments, this was insufficient to counter the impact of the COVID-19 pandemic, which led to widespread remote work.

WeWork's challenge was exacerbated by competition from its own landlords, who began offering short and flexible leases as a response to the downturn in the office sector. WeWork's customer base consisted of many startups and small businesses, and these clients reduced their spending as inflation rose and economic prospects dimmed.

In 2023, David Tolley, a former investment banker and private equity executive who previously helped a debt-stricken satellite communications provider emerge from bankruptcy, succeeded Sandeep Mathrani as WeWork's CEO.

Despite engaging in debt restructurings, WeWork could not prevent its bankruptcy. Last week, the company secured a seven-day extension from its creditors on an interest payment to gain more time for negotiations.

You might also be intersted in - WeWork’s stock drops 50%, expected to declare for bankruptcy next week