Ucommune Attempts to Beat Bad Precedent as Citi, Credit Suisse Exit the Deal

Like its U.S. counterpart WeWork, Ucommune has enjoyed rapid revenue growth but has yet to post profits.

CapitalWatch Staff
    Dec 13, 2019 7:00 PM  PT
Ucommune Attempts to Beat Bad Precedent as Citi, Credit Suisse Exit the Deal
author: CapitalWatch Staff   

Credit Suisse Securities (USA) LLC and Citigroup Global Markets Inc. are no longer underwriting the initial public offering of Ucommune Group Holdings Ltd., which has filed to raise up to $100 million in New York this week.

Previously, Citi and Credit Suisse were expected to secure the offering of the Beijing-based coworking space provider, Reuters reported, citing Ucommune's initial registration statements with the U.S Securities and Exchange Commission

"There was a big gap between what the company had hoped to achieve and where the market is sitting now," Reuters wrote on Friday, quoting a source with direct knowledge of the deal.

Instead, Haitong International Securities Co. Ltd. and China Renaissance Securities (Hong Kong) Ltd., are acting as the representatives of the underwriters, according to Ucommune's publicly filed prospectus. Also underwriting the deal are Core Securities Co. Ltd., Prime Number Capital LLC and CRIC Securities Co. Ltd.

Last month, Credit Suisse exited from the U.S. IPO of Chinese cryptocurrency mining equipment maker Canaan Inc. (Nasdaq: CAN) just before its listing, according to various filings.

Like its U.S. counterpart WeWork, Ucommune has enjoyed rapid revenue growth but has yet to report profits. Instead, its losses have been mounting.

In its filing on Wednesday, Ucommune said its revenue skyrocketed to $122.4 million in the nine months through September, up 210% year-over-year. Losses attributable to the company in the period have more than doubled from a year ago to $77.5 million, according to the report. For the year 2018, the company reported revenue of $62.7 million on losses of $60.1 million.

The financial results disclosed may cast doubt on the sustainability of the company that needs fresh capital. Ucommune's prospectus shows the company had around $23.4 million in cash as of Sep. 30. Further, it said it plans to continue investing in its expansion and setting up additional office spaces in China and overseas.

As Reuters reported, Ucommune is expecting to fast-track its IPO and debut as soon as early January. The approaching IPO drew comparisons to New York-based WeWork, which has been called "WeWorry" by The Economist for its IPO fiasco.

Distancing From a Bad Precedent

WeWork is a leading coworking office space developer, founded in 2010. Its membership base has been growing by over 100% every year since 2014 to 527,000 memberships by the second quarter of 2019 in more than 528 locations across 29 countries.

The company got a private valuation of $47 billion but ended up with a valuation of as little as one-fifth in the public market. It cut 12,500 jobs as of June 30 with a $900 million loss in the first six months of 2019 and long-term lease obligations of $17.9 billion. Meanwhile, additional layoffs are expected, according to CNBC.

Ucommune operates under a different model and aims to beat the bad precedent of WeWork's failed IPO earlier this year.

"Ucommune doesn't have long-term liabilities in the form of leases as WeWork, so it won't be exposed in the event of an economic downturn," as analysts at iAsk wrote in a report.

The non-current lease liability of Ucommune reached $218 million, given that its total assets were $758 million in September. The ratio is much lower than that of a $17.9 billion long-term lease obligation to its total asset of $27 billion in June 2019.

A number of the Fortune 500 companies, including Walmart Inc., Nike Inc. and ABB Group, have used Ucommune to gain a foothold in China's markets. Additionally, China's leading brands, including ByteDance's news app Toutiao, Alibaba Group Holding Ltd.'s (NYSE: BABA) produce retail chain Hema Fresh and children storytelling startup Kaishu Story have used Ucommune to expand in China's second- and third-tier cities.

After WeWork, the IPO market went through a pullback as investors are rethinking rushing in on companies with shaky financials. Still, other investors maintain a positive outlook.

Ucommune said it intends to use the proceeds of its offering in New York to expand its spaces and service offerings, to strengthen its technology and for working capital, as well as other general purposes. The company with global ambitions expects to trade its shares on the New York Stock Exchange under the ticker symbol "UK."

(Written by Belinda Zhou)