SoftBank Group Corp. 9984 -3.55% is in discussions to take a majority stake in WeWork Cos., in what would be a giant bet on the eight-year-old provider of shared office space, according to people familiar with the talks.
The investment could total between $15 billion and $20 billion and would likely come from SoftBank’s Vision Fund, some of the people said. The $92 billion Vision Fund, which is backed largely by Saudi Arabia and Abu Dhabi wealth funds as well as by SoftBank, already owns nearly 20% of WeWork after last year committing $4.4 billion in equity funding at a $20 billion valuation.
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Talks are fluid and there is no guarantee there will be a deal, some of the people said.
SoftBank and WeWork this summer were discussing a smaller investment that would value WeWork at up to $40 billion, The Wall Street Journal reported in June.
If a deal is completed, it would be one of the largest and more momentous deals of the past decade’s startup boom. SoftBank in January completed the biggest investment in a venture-backed startup, paying $7.7 billion for a 15% stake in Uber Technologies Inc. More than 160 private companies backed by venture capital have valuations of more than $1 billion, up from just a handful in 2010.
In eight years, New York-based WeWork has grown from a single office in Lower Manhattan to a workspace giant that rents more than 265,000 desks in 287 buildings, as of midyear. WeWork now occupies more Manhattan office space than any other company, renting 5.3 million feet there, according to real-estate-services firm Cushman & Wakefield.
That growth has been enabled by more than $6 billion in investment. Aside from SoftBank, investors include venture-capital firm Benchmark, China-based Hony Capital and JPMorgan Chase & Co.’s asset-management arm.
WeWork’s core business is office leasing: It takes on long-term leases for raw office space and builds out the interior with flexible spaces and modern design that it then subleases for terms as short as a month.
Despite the real estate focus, it has always marketed itself more like a tech company, as Chief Executive Adam Neumann has promised a lofty vision of connecting people and building community.
Mr. Neumann has recently described office space for WeWork as books were for Amazon.com Inc. —just a sliver of what it will become. His grand ambitions include developing entire neighborhoods full of not just its offices, but also WeWork-run apartments, gyms and even schools. Last month, it launched an elementary school, and it has bought a search engine optimization company, a software-coding school and even a stake in a wave-pool business.
WeWork’s valuation has long baffled real estate landlords as well as veterans of the serviced-office business, which offers a similar product—rental offices—though generally with a less-hip vibe. The leading company in that business, IWG PLC, had nearly twice as many desks for rent as WeWork as of June, but roughly one-fifth its valuation.
WeWork has also been racking up losses amid its investment in rapid growth, and recently those losses have begun to accelerate. In the first six months of the year, it posted losses of $723 million, wider than $154 million in the same period last year, according to numbers it provided to debt investors. In the same period, revenue more than doubled to $763 million.
WeWork has said its losses reflect its investment in growth, and its locations have healthy profit margins once they are open and fully leased. Fueling the growth are midsize and large companies that put divisions or groups of workers in offices for one to three years. Many of these companies like the flexibility of short-term leases, while WeWork absorbs the risk of paying the rent long-term, for 10 to 15 years.
Skeptics say WeWork’s investors who have given WeWork its billions don’t fully appreciate the risks of the business. Its client list still includes a big share of startups that may not be around for long, as well as larger companies that could leave in a recession. WeWork is on the hook for the long-term leases.
“They’re spending a lot of other people’s money very rapidly,” said Frank Cottle, who runs a network of serviced-office companies and sold a large portfolio of serviced offices to IWG’s predecessor, Regus, two decades ago. “The people investing in WeWork are looking at its story,” he said. “They’re ignoring its profitability.”
The potential deal also speaks to how SoftBank is shaking up the norms of startup investing. Its monstrous Vision Fund, which has focused mostly on startups, boasts a pool of money that is larger than the entire sum deployed by the venture-capital industry in U.S. companies last year.
Since it launched in 2017, the Vision Fund has showered its billions on companies ranging from younger startups like delivery company DoorDash Inc. and home-flipping firm Opendoor Labs Inc. to publicly traded companies such as chip designer ARM Holdings and auto maker General Motors Co.
SoftBank’s chairman Masayoshi Son has become a fixture of the Valley. He told investors in August that “most advanced” large startups will “join us as our family,” according to a transcript.
Mr. Son often makes gut-instinct decisions on investments at lofty valuations. At the company’s shareholder meeting in June, he said: “Feeling is more important than just looking at the numbers. You have to feel the force, like Star Wars.”
He has also made a strategy out of playing matchmaker to boost the prospects of SoftBank’s portfolio companies. A large share of WeWork desks in Tokyo, for instance, are occupied by SoftBank and its investment companies.
WeWork was a controversial investment within Softbank from the start, as multiple executives at the firm objected to it, saying it was an overvalued real-estate company, people familiar with those discussions have said. Mr. Son overruled them.
Write to Eliot Brown at eliot.brown@wsj.com, Dana Mattioli at dana.mattioli@wsj.com and Maureen Farrell at maureen.farrell@wsj.com
Appeared in the October 10, 2018, print edition as 'SoftBank Explores Majority Stake in WeWork.'