October 23, 2019 / 11:08 PM / a month ago

REFILE-UPDATE 7-SoftBank clinches WeWork takeover deal, bailing out co-founder

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    * SoftBank agrees to spend more than $10 bln to take over
WeWork
    * Gives near $1.7 billion payoff to Neumann to relinquish
control
    * Shares in SoftBank dropped 2.5% on Wednesday in Tokyo

    By Anirban Sen, Jessica DiNapoli and Jane Lanhee Lee
    Oct 23 (Reuters) - SoftBank Group agreed to spend more than
$10 billion to take over WeWork on Tuesday, doubling down on an
ill-fated investment and giving a near $1.7 billion payoff to
the U.S. office-space sharing startup's co-founder Adam Neumann
to relinquish control.
    The deal represents a stunning reversal of fortune for
WeWork as well as its largest shareholder, SoftBank Group Corp
        , which has committed more than $13 billion in equity to
a company that is now valued at just $8 billion.
    The bailout comes as SoftBank Chief Executive Masayoshi Son
is seeking to convince investors to participate in the Japanese 
company's second mammoth Vision Fund, for which he is seeking to
raise $108 billion. 
    To stem WeWork's bleeding, SoftBank will need to reverse its
widening losses and find a way to make it profitable.
    Shares in SoftBank dropped 2.5% on Wednesday in Tokyo, while
the cost of default protection on the firm has risen, with the
5-year credit default swap                jumping 17.7 points in
a week to the highest level since January.             
    The rescue financing also marks a dramatic fall from grace
for Neumann, who as recently as last month was preparing to take
WeWork public as CEO after attaining a $47 billion valuation for
it in January. 
    While WeWork employees now face the prospect of thousands of
layoffs, Neumann has secured a $685 million side deal with
SoftBank to step down from the board of WeWork's owner, The We
Company, according to people familiar with the arrangement.
    Neumann also has the right to sell $970 million of shares,
according to one of the sources, as part of a tender offer in
which SoftBank will buy up to $3 billion in WeWork shares from
existing investors and employees at a price of $19.19 each. 
    He currently owns a little over a fifth of WeWork, and is
expected to retain a stake.
    Neumann faced margins calls on his personal borrowings
against WeWork's private stock as a result of the collapse of
the company's valuation. 
    SoftBank has agreed to extend to him a $500 million loan to
repay a credit line from JPMorgan Chase & Co        , as well as
pay him a $185 million fee for a four-year assignment as a
consultant to WeWork, one of the sources said.
    Neumann had drawn down $395 million on JPMorgan's credit
line, another of the sources added. 
    Under the terms of the deal with SoftBank, he must use the
proceeds from selling his stock to first repay the loan extended
to him by SoftBank, according to the source. 
    Even though he will give up his board seat, Neumann will get
two representatives on WeWork's board, one of the sources said.
WeWork said in a statement that its board will be expanded and
control how Neumann's shares are voted. 
    Reuters first reported on Monday that Neumann was
negotiating stepping down from the board and would serve as an
adviser.             
    "The consulting arrangement is mind boggling. It's terrible
governance," said Nell Minow, vice chair of shareholder advisory
firm ValueEdge Advisors. "Why pay the guy who got WeWork into
this mess for advice. It's adding insult to injury and a little
more injury too." 
    Nevertheless, some WeWork investors said they supported the
deal.
    "Adam is a visionary who has created an impactful company
which has transformed the way many people work, live and think.
We think he deserved to take some money off the table for his
contribution to the company," said All Blue Capital managing
partner Matt Novak. 
    He declined to say how big his firm's stake in WeWork is.
    SoftBank said it will provide a $5 billion debt package to
WeWork, comprising $1.1 billion in senior secured notes, $2.2
billion in unsecured notes, and a $1.75 billion letter of credit
facility. WeWork picked SoftBank's offer over an alternative $5
billion debt package submitted on Monday by JPMorgan.
    SoftBank said it will also accelerate a previous $1.5
billion equity commitment to WeWork in the form of warrants that
are due in April at a new price of $11.60 per share.
    SoftBank said it will own 80% of WeWork following the tender
offer but will not be consolidating the company on its books
because it will not hold a majority of voting rights. SoftBank
will have four board seats on the company's expanded 10-member
board, one of the sources said. 
    SoftBank and its first $100 billion Vision Fund already
owned about a third of WeWork through previous investments
totaling $10.6 billion.
    All of the Vision Fund's interests in regional joint
ventures with WeWork outside of Japan will be exchanged for
shares in WeWork at $11.60 per share, SoftBank said.
    "We hope SoftBank can execute on this enhanced vision,
through leveraging its strategic partnerships, or otherwise, and
bring back value to WeWork's minority shareholders," said All
Blue Capital's Novak, adding his firm will be holding on to its
stake because it views SoftBank's tender offer price as too low.
    WeWork abandoned its initial public offering last month,
after investors questioned its large losses, the sustainability
of its business model and the way it was being run by Neumann,
who gave up his CEO title last month. He had retained his
position as chairman of the We Company. 
    SoftBank Chief Operating Officer Marcelo Claure will succeed
Neumann and become The We Company's executive chairman.
    "The new capital SoftBank is providing will restore momentum
to the company and I am committed to delivering profitability
and positive free cash flow," Claure said in a statement.
    Artie Minson, previously WeWork's chief financial officer,
and Sebastian Gunningham, who was a vice chairman at the
company, are now serving as its co-chief executives.
    
    POOR GOVERNANCE
    While Neumann's investors were willing to entertain his
eccentricities since co-founding WeWork in 2010, his
free-wheeling ways and party-heavy lifestyle came into focus
once he failed to get the company's IPO underway.
    During the attempts to woo IPO investors last month, Neumann
was criticized by corporate governance experts for arrangements
that went beyond the typical practice of having majority voting
control through special categories of shares.
    These included giving his estate a major say in his
replacement as CEO, and tying the voting power of shares to how
much he donated to charitable causes. Neumann had also entered
into several transactions with WeWork, making the company a
tenant in some of his properties and charging it rent. 
    Neumann, 40, is not the first founder of a major startup to
be forced to step down recently. 
    Uber Technologies Inc          co-founder Travis Kalanick
resigned as CEO of the ride-hailing startup in 2017 after facing
a rebellion from his board over a string of scandals, including
allegations of enabling a chauvinistic and toxic work culture.
    "I view this as SoftBank's moonshot to get WeWork back on
all fours," said Eric Talley, professor of law at Columbia Law
School. "They realize that Neumann's continued involvement in
the company would be a continued impediment to that."

 (Reporting by Jessica DiNapoli, Greg Roumeliotis and Joshua
Franklin in New York, Anirban Sen in Bangalore, and Jane Lee in
San Francisco; Editing by Steve Orlofsky, Tom Brown, Lincoln
Feast and Himani Sarkar)
  
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