WeWork Inc. is setting off on a path on which few have succeeded as it attempts to transform from a bloated company that never turned a profit into a slimmed-down moneymaker by 2025.
The company, which won bankruptcy court approval of its restructuring plan Thursday, will emerge from Chapter 11 with a clean balance sheet after slashing $4 billion in debt and cutting unprofitable leases. The onetime leader of the coworking space industry reduced its future rent obligations by more than half, it said.
The new company will make a profit next year, according to projections filed with the US Bankruptcy Court for the District of New Jersey. But very few large companies have gone into Chapter 11 having never made a profit — and emerged on the other side as a profitable organization, bankruptcy lawyers and professors said.
WeWork is also still facing many of the same headwinds it confronted before the bankruptcy, namely ongoing uncertainty about employees returning to in-person work and related troubles in commercial real estate.
“Forecasting a return to profitability is one thing—accomplishing it in this environment is a whole other story,” St. John’s University bankruptcy law professor Anthony Sabino said in an email.
WeWork filed for Chapter 11 protection in November after going public in 2021 through a blank-check merger, and after a botched initial public offering in 2019.
Hundreds of millions of dollars in new financing required to secure WeWork’s bankruptcy exit is on the line in the coming years. The company intends to operate more than 300 locations worldwide, it said in court filings. In a news release announcing its exit from bankruptcy, it said it would operate about 600 locations.
The lower figure listed in court filings includes only joint ventures and wholly owned locations and doesn’t include franchises, a WeWork spokesperson said in an email.
History of Profit
Some of the more successful reorganizations in recent years involved companies, including major retailers like Neiman Marcus and airlines like United Airlines Holdings Inc., that hadn’t made money in the years leading up to their bankruptcies. But many of those companies had previously shown an ability to turn a profit.
Despite all the hype and billions of dollars in high-profile private equity funding poured into WeWork since it was founded in 2010, it has never made a profit.
It’s “extremely rare” for a major company to become profitable after Chapter 11 when it had never made money before, NYU finance professor emeritus Edward Altman said.
But Daniel Y. Gielchinsky, a partner at DGIM Law PLLC, suggested WeWork could be different, having ended its hypergrowth and emerged from bankruptcy as a “more financially sound version of itself.”
“The balance sheet makes sense, the financial model is sustainable, and the platform will be more accessible to business of all sizes,” Gielchinsky said in an email.
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The Skeptics
WeWork’s post-bankruptcy ambitions have at least one skeptic, albeit one with a notable conflict of interest. WeWork founder Adam Neumann, who until the last minute pursued a bid to purchase the company out of Chapter 11, said its restructuring plan could lead to another crash.
“Even small misses in the Debtors’ projections would quickly doom the Company to chapter 22,” Neumann said in a April 26 court filing, using the colloquial term for a second Chapter 11 case.
WeWork will lose $15 million through the rest of this year, according to net income projections it filed with the bankruptcy court. But it will make $101 million next year and steadily increase its profit to $343 million in 2028, the projections say.
The new company is worth between $665 million and $865 million, according to the projections, down from a peak evaluation of $47 billion.
WeWork expects to keep its number of locations around 330, the projections say, but it anticipates an increase in occupancy to 85% in 2028 from 76% this year. That comes as commercial real estate continues to lag and many companies allow their employees to work remotely. Nearly a quarter of the American workforce will work remotely by 2025, according to a 2020 study by Upwork.
“The work from home environment, makes it very unlikely they would turn a profit,” Dartmouth professor Gordon Phillips said in an email.
WeWork’s restructuring plan includes $450 million in new financing. About 60% of its equity will go to an entity backed by Yardi Systems, a company that developed an office management software with WeWork prior to its bankruptcy.
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WeWork said it’s in a strong position to navigate an uneven real estate landscape.
“WeWork’s approved Plan of Reorganization positions the Company to deliver sustainable, profitable growth,” it said in a Thursday press release.
Lenders, including
Success Stories
The history of Chapter 11 is filled with success stories. United Airlines Holdings Inc., American Airlines Group Inc., and Delta Air Lines Inc. are operating more than a decade after they went through some of the largest bankruptcies in history. United emerged from Chapter 11 in 2006, Delta in 2007, and American in 2013.
Unlike WeWork, all of those companies had profitable years before their filings, which were variously attributed to a broad slump in the industry, high fuel and labor costs and other factors.
Major retailers like Neiman Marcus and JC Penney have turned profits after emerging from early pandemic-era bankruptcies. Like WeWork, those companies used bankruptcy to shed unprofitable locations.
But unlike WeWork, they had already shown the ability to turn a profit before they went bankrupt.
Like those retailers, WeWork intends to be a “leaner, meaner machine coming out of bankruptcy than going in,” Candice Kline, a bankruptcy partner at Saul Ewing LLP, said.
WeWork’s new CEO, David Tolley, is a veteran of a successful Chapter 11. Tolley was CFO at satellite services provider Intelsat SA when it filed Chapter 11 in 2020. It cut a $16 billion debt pile down to $7 billion, and made a profit last year before selling itself in April for $3.1 billion.
Now separated from its ambitious founder, WeWork hopes now is the right size to succeed.
WeWork “can be optimistic, but it has a whole set of problems unique to the times,” Sabino said.
