WeWork, according to the founders’ blurb, is “a place you join as an individual, ‘me’, but where you become part of a greater ‘we’. A place where we’re redefining success measured by personal fulfilment, not just the bottom line.” Very uplifting, but you’d probably think twice before investing. Funky murals and cheese-tasting events for tenants are eye-catching but, in the end, WeWork is a provider of office space on short-term leases, which is a notoriously cyclical game. And, despite opening offices in more than 70 cities around the world, WeWork currently makes substantial losses.
However, SoftBank of Japan, one of the world’s biggest and most adventurous investors, is keen to throw serious sums at the company. It has already invested $4.4bn and, according to reports, is lining up another $10bn or $20bn. Softbank’s co-traveller is Saudi Arabia’s sovereign wealth fund via the duo’s enormous $100bn Vision Fund, which aims to make big bets on businesses of tomorrow.
You certainly need to be a visionary of some kind to see how WeWork could possibly be worth the implied valuation of about $40bn. Losses more than quadrupled in the first half of this year to $723m. Even if you prefer to concentrate on revenues, and overlook the costs of rapid expansion, it’s hard to make sense of it. Revenues will still only be $2.3bn at the end of this year, said the company in August, and that was on a flattering “run rate”, or annualised, basis.
SoftBank’s founder, Masayoshi Son, made one of the great investments when he backed Alibaba, the Chinese online retailer, in its early days, so his record can’t be ignored. But the punt on WeWork looks bizarre. Old-hand property experts point to the fundamental risk of taking on long leases on big buildings and offering tenants short, flexible rents. In a downturn, they argue, the fixed costs will remain but income will be vulnerable. It seems a reasonable point.
Indeed, it is one reason why the UK group IWG, which has been offering short-term office space for 30 years, is valued at only £2bn, despite making real profits and having more revenue than its US competitor. Its investors know that this corner of the property world is cyclical. What’s more, the space is being crowded as the overhyped rise of WeWork spawns imitators at a furious pace. WeWork is a bubble, surely.
Luke Johnson must be choking on his Patisserie Valerie éclair
If you prefer your business pundits to have firsthand business experience, Luke Johnson is your man. He’s a punchy writer who shares wisdom learned from his years at Pizza Express and elsewhere. One of last month’s columns in the Sunday Times was excellent – “an aide-memoire for those looking to spot the next fraud”. Identifying swindles is not so difficult, apparently, because “many of the same tricks were played 50 or even 100 years ago”.
Now – with cruel timing – the owner of Patisserie Valerie, a company where Johnson is executive chairman and owns a 37% stake, has caused co-investors to choke on their mille-feuille. The board “has been notified of significant, and potentially fraudulent, accounting irregularities.”
Chris Marsh, the chief financial officer who joined with the Johnson-led buyout in 2006, has been suspended from duties. Johnson is leading the investigation. By lunchtime on Wednesday, he revealed that a winding-up petition had been filed in the high court against the group’s main trading subsidiary four weeks ago. It was not explained how the board could previously have missed this information.
Beyond that, Patisserie Holdings isn’t saying much. But, if the size of the accounting irregularities is £20m, it’s a mighty mouthful. The sum is equivalent to last year’s entire pre-tax profits. Alternatively, it represents about eight years’ worth of dividends at last year’s payout ratio. The only safe bet is that Patisserie won’t be valued at £450m if and when trading in the shares resumes.
Still, it’s all useful material for future columns. Johnson could expand on a thought in another recent dispatch: “Most of us think we know more than we do.”
Trade unions should recruit outside traditional industries
It’s hardly fresh news that unionised workers tend to be able to secure higher wages, but it’s still remarkable to see some hard numbers, courtesy of the chief economist of the Bank of England. The premium has been found to lie in the range of 10%-15%, says Andy Haldane. And the effect of falling levels of union membership has been to lower wage growth by 0.75 percentage points per year over the past 30 years.
You could view these statistics as valuable recruiting material for trade unions. That’s certainly the case. But union leaders should also look in the mirror. Their own failure to expand outside traditional industries is also part of the tale. There are signs of improvement – but too few.