Morgan Stanley analysts say that Goldman Sachs could take a $264 million hit on its WeWork stake
- Morgan Stanley analysts said in a recent note they are now 'baking in' Goldman Sachs taking a $264 million writedown on its WeWork investment in its third-quarter earnings.
- Jefferies said in September that it wrote down $146 million related to its WeWork stake, citing uncertainty around timing and pricing of the co-working company's IPO.
- "We think it is possible that some of the banks we cover may also take similar writedowns," Morgan Stanley analyst Betsy Graseck said in a note to clients.
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With WeWork's initial public offering officially off the table, Morgan Stanley analysts now expect one of the would-be underwriters to report a third-quarter writedown on its own stake in the co-working company.
The analysts are now "baking in" a $264 million writedown to Goldman Sach's private shares in the We Company, WeWork's parent. That hit will come through in Goldman's investing and lending (I&L) business, the analysts said
That outlook comes after the financial services firm Jefferies told investors back in September that it had to write down $146 million related to its own WeWork investment in the third quarter because of uncertainty about timing and valuation of an IPO. That writedown was as of August 31 - more than two weeks before WeWork shelved the offering entirely.
"Based on this announcement, we think it is possible that some of the banks we cover may also take similar writedowns," Morgan Stanley analysts led by Betsy Graseck said in a note to clients dated October 4.
WeWork unveiled its filing to go public in August. But it was forced to contemplate a massive valuation cut before ditching the offering entirely, and its co-founder Adam Neumann stepped down as CEO in late September.
Goldman is slated to release third-quarter earnings later this month. The bank did not immediately respond to a request for comment on the earnings outlook.
Morgan Stanley sees the total I&L revenues down 43% from a quarter earlier and down 29% year-over-year, thanks to both the WeWork writedown and hits to Goldman's public equities portfolio.
The Morgan Stanley analysts arrived at that $264 million writedown estimate using details of prior venture capital funding rounds provided by data analytics firm PitchBook.
Morgan Stanley estimated that Goldman Sachs owns a 1.4% stake in WeWork, and that JPMorgan, which was slated to be WeWork's lead underwriter, owns a 4% stake. That's compared with with Jefferies' estimated 0.8% stake.
The analysts also pointed out that Goldman performs "event-driven" write-ups and write-downs on its private equity portfolio, citing April commentary from Goldman Chief Financial Officer Stephen Scherr.
"You may see up or down movement in the private equity portfolio, occasioned by some event where we might sell a position," Scherr said on an April earnings call. "It might be that there's another round of equity investing at a different valuation level that causes us to re-mark that."
Graseck did not put a number on any such writedown for JPMorgan, attributing that decision to how it appears JPMorgan has been accounting for private stakes.
"We do not see any indications of material write ups in the prior year when The We Company raised private funding at higher valuations," she wrote. "We believe this means that JPM's accounting treatment for The We Company is book value, and not based on post funding round valuations."
Morgan Stanley was not among the banks that had signed on to underwrite WeWork's now-shelved initial public offering.
Recently, Morgan Stanley's chief US equity strategist wrote in a separate note that WeWork's failed IPO should be viewed as a cautionary tale for richly valued, money-losing unicorns.
Mutual funds offered by Fidelity, T. Rowe Price, and Hartford Funds have all changed up the valuations they are putting on private shares of WeWork, we reported in early September.
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