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SoftBank may need to write down its stake in WeWork if the IPO is valued below $25 billion, Bernstein says

Key Points
  • SoftBank could be forced to write down its multibillion-dollar investment in WeWork if the company fetches an IPO valuation below $25 billion, Bernstein analysts said in a note Tuesday.
  • WeWork, which rebranded to The We Co. in January, is still trying to gauge investor appetite for a planned offering valued at between $15 billion and $20 billion.
  • "The lower the IPO value, the greater the recorded loss and greater the dilution for SoftBank," Bernstein analysts said.
A man enter the doors of the 'WeWork' co-operative co-working space on March 13, 2013 in Washington, DC.
Mandel Ngan | AFP | Getty Images

SoftBank could be forced to write down its multibillion-dollar investment in WeWork if the company fetches an IPO valuation below $25 billion, Bernstein analysts said in a note Tuesday.

WeWork, which rebranded to The We Co. in January, is still trying to gauge investor appetite for a planned offering valued at between $15 billion and $20 billion. At that level, WeWork would be worth less than half the $47 billion private valuation assigned to it after a $2 billion investment in January by SoftBank's Vision Fund.

If The We Co. garners an IPO valuation of $15 billion, SoftBank would record write-downs of $1.2 billion on its direct investments and a $1.6 billion loss for the Vision Fund, Bernstein said. This would likely lead to "large volatility" in SoftBank's business in the near term, with operating profit taking a hit of 15% if WeWork's IPO is valued at $20 billion, the firm added.

"The lower the IPO value, the greater the recorded loss and greater the dilution for SoftBank," Bernstein analyst Chris Lane said. "Combined with the current weakness in Uber and Slack (both stocks have declined approximately 30% since June 30th), we are likely to see a weak quarter for the Vision Fund."

The We Co. is still determining its plans for an IPO and its advisors met with SoftBank to discuss shelving the offering. However, sources told CNBC's David Faber that the IPO is full speed ahead, with the company's roadshow expected to kick off as soon as Monday.

Reports have said SoftBank could provide WeWork with a much-needed short-term investment, which would allow the company to stay private for a longer period of time. Lane said WeWork will probably only consider this option if it can still raise $6 billion in debt.

"Given [SoftBank's] bullish view on the long-term outlook for the company, they may see this as an opportunity to double down," Lane said. "The investor road-shows over the next week will be critical in determining the direction forward."

WeWork continues to face criticism around its complicated corporate structure, governance and ballooning losses. Lane said WeWork could require as much as $7.2 billion over the next four years to become cashflow positive and, if a recession hits, it may need as much as $9.8 billion.

Even with a potential recession on the horizon, Lane said he maintains that WeWork is a "fundamentally attractive business" with solid long-term prospects.

"In either case, an investment at a $20B valuation today has good potential for long-term upside," he added.

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WeWork IPO full speed ahead roadshow to kick off Monday, sources tell CNBC