Breakingviews - SoftBank in danger of over-WeWorking itself

A guest attends the opening ceremony of WeWork Hong Kong flagship location in Hong Kong, China February 23, 2017. REUTERS/Bobby Yip

HONG KONG (Reuters Breakingviews) - SoftBank is in danger of over-WeWorking itself. The Japanese group may invest up to $20 billion for a majority stake in the office-sharing outfit, the Wall Street Journal reports. Such a large holding could end up comprising roughly a fifth of SoftBank’s tech-focused Vision Fund. That would be a scary amount of concentration risk, especially for an unproven business model.

Masayoshi Son’s empire last year injected $4.4 billion into the growing if money-losing collection of millennial-friendly offices. Between his telecom group and the intended $100 billion mega-fund it oversees, SoftBank already owns about 20 percent of WeWork.

With its hip touches, the company led by Adam Neumann has persuaded investors it is upending the workplace. That story has helped it evade comparisons to more pedestrian, and profitable, rival IWG, whose market capitalisation is below $3 billion. WeWork last raised money at a $20 billion value and may touch $40 billion if SoftBank returns for more.

One major WeWork challenge is that there is little to stop copycats. It must therefore spend heavily to grow quickly and lock down prime locations with long-term capitalised leases.

Another $20 billion from Son would provide plenty of firepower, but burning through cash is no guarantee of success. Though IWG recently abandoned talks with three suitors, someone else could easily buy it – and its $2 billion worth of property, plant and equipment – and build it into WeWorkToo.

For SoftBank and its Vision Fund backers including Saudi Arabia, the bigger question is about putting so many eggs into one basket. Most investors prefer to spread their bets, on the assumption that most will fail but that outsized returns from a success story or two will more than compensate. It’s how Son parlayed a $20 million investment into a stake of over $100 billion in Alibaba.

Of course, similar reports about SoftBank putting money into reinsurer Swiss Re ultimately came to nothing. If Son proceeds with a bigger slug of WeWork, however, and depending on how he divvies up the deal, the Vision Fund could wind up disproportionately exposed to one company. It would suggest a high degree of conviction, but also overconfidence and a lack of places to put money to work.


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