WeWork gets a crap deal but Embassy gets a great one
Two valuations of the same company at the same time can apparently coexist
You can listen to an amateur voiceover of this post by clicking the button above, or on Spotify | Apple Podcasts | YouTube.
Well, here’s a convenient transaction. From the Economic Times:
Embassy Group is looking to list coworking office platform WeWork India in the domestic bourses within 18 months after acquiring US-based WeWork's 27% stakeholding in the Indian entity for about ₹700 crore, said two people with direct knowledge of the matter.
Post the acquisition, the Bengaluru-based property developer will own 100% of WeWork India. Of the total, Embassy will sell 40% stake to Enam Group, A91 Partners, CaratLane founder Mithun Sacheti, and others for ₹1,200 crore, said the people cited above.
Following the divestment, Embassy will retain a 60% stake, inclusive of 5% as Esops, before proceeding with an initial public offering, the people said.
Embassy Group is a real estate company. It owns 73% of WeWork India.1 WeWork US owns the remaining 27%. WeWork US is, unfortunately, bankrupt. So it wants to sell off its 27% stake in WeWork India to do bankruptcy stuff like repaying lenders, affording its lawyers, you get the idea.
Embassy is buying out WeWork US’s 27% for ₹700 crore. That’s a ₹2,600 crore ($310m) valuation. Embassy will then own 100% of WeWork India. All good till now. But then Embassy itself will sell 40% of WeWork India to some outside investors for ₹1,200 crore. That’s a ₹3,000 crore ($360m) valuation.
There are already two valuations here. Embassy buys from WeWork US at ₹2,600 crore and sells to Enam Group and the others at ₹3,000 crore—a 16% difference. But chuck that. There’s more happening here.
Embassy doesn’t really end up owning 100% of WeWork India. I mean, it might in theory, but it’s just flipping its stake. Here’s another way to interpret the same transaction:
Enam Group, etc. are the ones buying 27% of WeWork India from WeWork US. They’re paying ₹700 crore. That’s the original ₹2,600 crore valuation.
They’re also buying another 13% from Embassy. For this, they’re paying ₹500 crore. That makes it a ₹3,800 crore ($450m) valuation.
In the reported version that I quote at the start, Embassy pays ₹700 crore and gets ₹1,200 crore. But it’s effectively Enam and the other investors who are paying that ₹700 crore. And, separately, paying another ₹500 crore to Embassy for its stake. That’s ₹1,200 crore in all.
The two valuations are ₹2,600 crore and ₹3,800 crore—a 46% difference!
Buyer beware
WeWork India is a private company with two shareholders. Embassy is the majority shareholder, WeWork US is the minority shareholder. WeWork US is desperate to sell, and Embassy is in a position to call the shots.
Private companies’ shareholders’ agreements can have pretty much anything written into them.2 Embassy almost certainly has a “right of first refusal” which gives it the first right to buy WeWork US’s stake if it wants to sell. It also probably has other transfer restrictions which make it difficult or maybe even impossible for WeWork US to sell to an outside investor directly, even if they offer a better price.
The gist of it is that Embassy can dictate who WeWork US sells to, and consequently at what price. In 2020, WeWork had invested $100 million in WeWork India for its 27% stake. It’s been 4 years now, and WeWork India seems to be doing reasonably well. And yet, WeWork is losing money on its initial investment—it’s selling for only about $85 million.
WeWork US is selling to Embassy-approved investors at the “family & friends” price. Embassy is keeping the real deal for itself.
Cover Photo by Karolina Grabowska/Pexels.
From what I gather, Embassy owns 68% and has another 5% allocated for employees as compensation via stock options.
There’s nothing extraordinary about transfer restrictions—no company would want possibly rogue investors buying its shares, for instance—sometimes a company might go overboard with what it writes in the shareholders’ agreement. Byju’s is a good example. When investors are buying, they might not choose to ignore oddities in the contract, lest they lose the deal. But later they end up in court!