You can short WeWork In April 2018, shared-office-space company WeWork Cos., which now goes by We Co., issued some bonds. WeWork was sort of an interesting credit insofar as it had had a net loss of about $884 million, on revenues of $886 million, in 2017, and was in the middle of losing even more money in 2018. Its free cash flow, and its earnings before interest, taxes, depreciation and amortization, were negative and looked likely to stay that way for a while. It did not have all the traditional indications of a company that could confidently pay back its debt. But WeWork overcame those obstacles and sold $702 million of bonds. How? Partly by paying a high interest rate, sure. But two other things helped make investors comfortable. One is what we sometimes call the "Netflix theory" around here: WeWork had such a huge equity valuation that bondholders figured a big equity cushion protected their investment. Exactly what this equity cushion contained is slightly mysterious—the equity valuation reflected growth expectations, not cash or hard assets that could be sold to pay debt—but it is a theory that was pretty popular at the time and makes some sense. The other thing is that WeWork marketed the bonds using a novel financial metric called "community adjusted Ebitda." This got made fun of a lot, because it is a funny term and WeWork kind of went overboard on the funny terms; when a company whose "mission is to elevate the world's consciousness" starts talking about "community adjusted Ebitda" you assume, at some level, that they're kidding. But the intuition behind community adjusted Ebitda was mostly fine; it was meant to be a measure of earnings from WeWork's actual office rentals, stripping out a lot of the costs of its expensive strategy of rapid growth. I wrote at the time that community-adjusted Ebitda was sort of an answer to an important question for bond buyers: If WeWork is not a fast-growing tech darling, if SoftBank is no longer willing to put money into it, if its equity has lost its luster — will it have enough money to pay back the bonds? In the downside, no-growth, no-hype case, will it generate enough cash to pay its debts? And "community adjusted Ebitda" — look, it's not perfect, and obviously it's shaded in a way to favor the company — but it's arguably a way to measure that. Strip out the growth and the events and the corporate-level compensation, focus on the basic economics of rent coming in and rent going out, and see if it's enough to cover the debt. In an alternate world where the bondholders seize the company, cut all the nonsense, and focus on paying themselves — will there be enough there for them? One interesting thing that has happened recently is, oh boy has WeWork stopped being a fast-growing tech darling as its equity has lost its luster! After public investors pushed back, WeWork abandoned its proposed initial public offering, which was supposed to raise $3 or $4 billion and unlock another $6 billion of (senior secured) bank financing. Bad for WeWork's equity; bad for its big equity investors like SoftBank Group Corp. But what about the bonds? On the one hand you had that "equity cushion," meaning in this context something like "demonstrated willingness of SoftBank to pump in billions of dollars at high valuations," and now you don't so much. So that's bad. On the other hand, as I wrote last month, paraphrasing WeWork's own prospectus, the withdrawn IPO "presents WeWork with a golden opportunity to manage its profitability profile." Without the huge infusion of IPO cash, WeWork can cut back on all of the money-burning growth and focus on turning a profit at its existing locations. Which, as it told bondholders under the "community-adjusted Ebitda" heading, and as it told the world in different terms in its IPO prospectus,[1] it could do. There's an argument that withdrawing the IPO should be credit-positive for WeWork: Now instead of losing a lot of money, it will flip the profitability switch, adjust the Ebitda to the communities, and buckle down to make money. Losing a lot of money to grow can be good for your stock price, but making money is better than losing money as far as your bondholders are concerned. And WeWork really is taking steps in that direction, cutting costs and slowing down expansion and new leases. Of course there are counterarguments. The IPO was going to raise a lot of money, and having a lot of money is also good for bondholders.[2] And of course if you are not fully confident of WeWork's ability to promptly flip the switch and start making money—or if you think that the embarrassment of the IPO diminished that ability—then you might be worried now. What does the market think? Hahaha sorry, only bad things. The bonds are trading at about 85 cents on the dollar, down from almost 105 in August, and have been downgraded by S&P and Fitch. Also: Investors have placed a record level of bets against WeWork's bonds since the lossmaking property group abandoned its initial public offering and its credit rating was slashed deep into junk territory. More than $67m of the company's $669m of corporate debt was on loan, according to data provider IHS Markit. This is a proxy for "short positioning" in the bond, where investors profit if the price of the debt declines. … "It makes sense as a 'pile on' trade," said John McClain, a portfolio manager at Diamond Hill Capital Management. "All the sentiment, all the headlines have been bad. It's led to a feasting on a failed unicorn." It does make sense, right? Everyone had a good laugh at WeWork, and then it slunk away from the public markets. If you were a fierce critic of WeWork, the withdrawn IPO might be a moral and intellectual victory for you, but it's not like you made any money off of it. You couldn't short WeWork's stock to profit from your correct view that no one else would want to buy it, and now that the IPO has been postponed you still can't. It is satisfying to be right and amusing about WeWork on Twitter, but really in financial markets one wants to get paid for being right. There are the bonds though. If you are really negative on WeWork you can bet against the bonds. In theory the bonds are not the same as the stock; in theory, there are events that could be bad for WeWork's stock and good for its bonds. In practice they seem pretty connected. Uber but for Uber Huh: Uber Technologies Inc. is launching an app aimed at pairing businesses with temporary workers in an effort to bring in more revenue as the company struggles to turn a profit. The Uber Works app, launching in Chicago on Friday, will match workers such as chefs and cleaners with companies looking to fill a temporary opening, the company said late Wednesday. The app enables users to sift through jobs by location, pay and skills, Uber said, adding that it spent the past year testing it. One way to think about Uber is that it is a software marketplace platform that matches independent business owners (drivers) with customers (passengers) and takes a cut of the businesses' revenue in exchange for allowing them use of the marketplace. I don't think there's a person on earth who thinks about Uber that way, but you could. It is notionally what is going on, it is the deep theory behind Uber, it is the explanation for why Uber's drivers are not (always) treated as employees. (It is also a weird potential antitrust problem?) To the customer, and probably to a lot of drivers, Uber feels like a taxi company that employs drivers, sends them to customers, and pays them a wage based on the fares they bring in, but as a matter of legal incantations it's the platform thing. One reason the platform thing looks too cute is that that Uber drivers do not obviously fit social expectations of small business owners? Like it is hard to get rich driving for Uber. If you operate an Uber-driving business you tend not to have employees; you just drive a car for Uber. (Sometimes you lease your car through Uber.) It undermines the platform thing a bit, if the businesses selling stuff to customers on the platform have no independent business off of the platform and so little negotiating leverage with the platform. On the other hand, once you have the platform, you might as well expand the basic idea to real businesses! "Hey, we have an app that can connect a person who does a thing with a person who wants to pay for a thing, why not have it connect people who do things with companies who want to pay for things?" If Uber finds a chef for a restaurant, and that chef goes to work for the restaurant, it's harder to argue that the chef is an employee of Uber. (You might argue that she's an employee of the restaurant, though in fact Uber will be partnering with staffing agencies who will employ the workers.) And if Uber is matching all sorts of people with all sorts of roles, then that undermines the argument that it is essentially a taxi company. "We're essentially a matching platform," you can say, when you're matching chefs and cleaners and drivers and everything else. Does Uber set the prices, by the way? Like there are platforms (eBay, stock exchanges, etc.) that let buyers and sellers specify the prices they want to charge and pay for things, but Uber's driver platform has a proprietary algorithm that sets the price; drivers and passengers just take what Uber tells them. I wonder if you can do that with other forms of employment. Do you think it pains the Uber engineer who has to floor the wage-setting algorithm at the legal minimum wage? "In periods of low demand there will be workers who don't match with jobs, who could match if we just lowered the price, this is basic economics here, how can anyone criticize it?" Lunch Stuff I style myself, on Twitter, a "lunch valuation analyst," but I confess there are things that I do not understand about the charity-lunch market. Like Warren Buffett does one every year, and it is always a big thing and goes for millions of dollars, and this year a crypto entrepreneur bought it for $4,567,888 and threatened to spend the lunch talking about blockchain, and then the lunch became an international incident and was mysteriously postponed. And I get it, he is the biggest financial celebrity alive, people want to have lunch with him and publicize it, fine. But there is not a deep liquid market for other financial celebrity lunches. It's not like Carl Icahn auctions off an annual lunch and makes a big thing of it, or Jim Simons, or Larry Fink. Ray Dalio did one once, back in 2016, but it doesn't seem to have gotten a ton of traction in the public consciousness. Why isn't this more of a thing? Why don't aspiring financiers have a whole menu of famous finance people to buy lunch with? Perhaps Buffett is too tough a comp; if you think that you're at least as brilliant and interesting as Buffett, it's gonna be tough on your ego to sell a lunch for $5,000 when Buffett is getting close to $5 million. But Bill Ackman is undeterred. He did one last year, and I wrote about it, and put a fanciful valuation on lunch with Ackman by comping him to Buffett, and then someone bid my fanciful valuation because he read it in Money Stuff, and won, and had the lunch, and there were follow-up articles, and now I am cursed with this job forever. And it is forever, because the Ackman lunch is an annual thing: Bidding kicked off Wednesday on the auction site Charitybuzz, offering the chance to meet the wealthy investor over a meal where the winner can "discuss the world of finance!" According to the website, the lunch will take place on a "mutually agreed upon date" and last for approximately 1-2 hours — and Ackman will pick up the tab. … For Ackman's inaugural lunch in 2018, entrepreneur Andrew Wilkinson, who runs Victoria, Canada-based tech holding company Tiny, shelled out $57,700. It turned out to be an excellent investment that led to a friendship and business partnership. Ackman's family offices invested in one of Wilkinson's portfolio companies, and was his first time accepting outside capital. I have looked at a series of … Fibonacci … Hindenburg … I don't know let's pretend I did some sort of highly technical proprietary lunch analysis and came to the conclusion that you should bid $114,808 for this lunch and invite me as your guest. If that is actually what happens, I will be … tired. Food Stuff It has been a while since we talked about my favorite sub-genre of business news, the food marketing story, but oh man does the Wall Street Journal have a great one today. It has a deceptive headline, "The Pleasures of Eating Alone," which sounds like it might be about the real and civilized pleasure of dining solo at the bar of a restaurant. But, no, the actual story is about how large food companies are meeting people's desire to suck down glop alone in the privacy of their homes: "They want simple, easy prep and they often want fewer components." With that in mind, this summer Kraft Heinz introduced Fruitlove, a smoothie that includes three to six fruits and vegetables, plus yogurt. "You want your food to do more for you," she says. "We included the fruits and vegetables so consumers don't have to think about that." Billing it as a smoothie that needs a spoon, rather than a straw, also makes it feel more satisfying, Ms. Obbard says. "Consumers don't always want to drink their food," she says. Not always, no! Sometimes they are even willing to chew, as long as you can offer them "rapid hand-to-mouth": Accommodating flexible eating is driving Tyson's new foods. Last year, the company introduced Jimmy Dean Protein Packs, individual containers holding a peeled, hard-boiled egg, sausage pieces and cheese. The foods can be quickly grabbed and eaten in small bites, which fosters "rapid hand-to-mouth," another requirement of flexible eating, Ms. Bentz says. Tyson's Any'tizers chicken chips, launched this spring, are bite-sized chicken fritters shaped like triangular chips. The chicken chips are meant to be a more filling alternative to traditional potato chips, Ms. Bentz says. "Finally, you can eat chips for dinner," Tyson's website reads. "Take that, society." In past editions of Food Stuff we have talked many times about the rise and fall of eating things out of bowls, but at least in the ready-made-dinner-for-one category bowls are still on-trend: After studying how solo diners gravitated toward flavor-packed bowls of bite-sized food at casual restaurant chains like Chipotle, researchers at Conagra Brands realized it was time for a shake-up in its frozen-food lines. In recent years the company rolled out frozen foods in bowls, including Healthy Choice's Power Bowls and Banquet's Mega Bowls. "It is more convenient eating—everything is mixed together and the flavors blend in a new way," says Bob Nolan, Conagra's senior vice president of demand sciences. The food inside the bowls come "bite-ready," giving solo eaters the mobility they want at home, he says. "Solo meals are with a fork only," says Mr. Nolan. "A knife means sitting at a table, not on the couch." Is there a wiser or more profound sociologist than a big food marketer? (Sorry, "vice president of demand sciences.") These are the successors to Norbert Elias, people who think deeply and well about the social meaning of spoons and knives, whose mission in life is to understand what our cutlery says about our beliefs and emotions and aspirations and where we're sitting. Take that, society! Things happen Everything Is Private Equity Now. At Private Silicon Valley Summit, No Love for IPOs or Banks. Agent-based models and bank stress tests. BlackRock in Talks With Tencent on China Tie-Up. White House Official Rebuffs Venezuela Bondholders on Trade Ban. A Surprise Ruling Puts Altaba Stock's Future in Limbo. Jeffrey Epstein Raked In $200 Million After Legal and Financial Crises. Kushner's Cadre in Talks With Saudi-Backed SoftBank Fund. Bodega, once dubbed 'America's most hated startup,' has quietly raised millions. Entrepreneurs Who Sleep More Are Better at Spotting Good Ideas. Nigel Night. Fat Bear Week. "'Pretentiousness and Britishness may come into the mix,' Vaux told me. I perked up." Patricia Lockwood on John Updike. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] "If we stopped investing in our growth and instead allowed our existing pipeline of locations to mature, we would no longer incur capital investments to build out new spaces or the initial expenses associated with driving member acquisition at new locations. Rather, we expect that each mature location would generate a recurring stream of revenues and contribution margin. We believe that the flexibility to manage our growth by focusing on our existing pipeline of locations and allowing them to mature presents us with an opportunity to manage our profitability profile." That doesn't exactly *say* "if we turned off the growth we'd be profitable," but it implies that. [2] Although much of that money—the $6 billion of bank financing—would have been senior to the bonds. |
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