Ucommune Goes for NASDAQ Backdoor Listing at 75% Discount From 2018 Valuation

Ucommune, China’s largest co-working operator has finally gone public, but not through the IPO that it had touted for more than two years, and at a valuation nearly one-quarter of its peak pricing, according to an announcement earlier this week.

The company led by former China Vanke executive Mao Daqing, said in the statement it had agreed to merge with NASDAQ-listed Orisun Acquisition Corp. in a reverse takeover deal that values the combined entity at $769 million — down from the $3 billion valuation that the Beijing-based firm had achieved two years ago.

Under the deal, Orisun’s wholly owned unit Ucommune International will buy Ucommune, resulting in the subsidiary becoming a listed company on NASDAQ. Orisun is a “blank check company’ formed for the purpose of acquisitions, particularly in China, according to its own statement. The Delaware-based firm listed on the NASDAQ exchange in August of last year.

The deal comes after Beijing-based Ucommune failed to launch an initial public offering with Citigroup and Credit Suisse in December last year being reported as walking away from underwriting the IPO over what was seen as an unrealistic target valuation of $2.6 billion in the wake of the WeWork fiasco.

Pressure to Achieve Listing Status

“Ucommune seems determined to be a public company, despite Wall Street’s less than enthusiastic response,” said Brock Silvers, chief investment officer of Adamas Asset Management in Hong Kong. “Early investors must be fiercely pressuring founder Mao Daqing, who now seems to be undertaking a reverse merger process at a reported 75 percent discount to the company’s $3 billion valuation in 2018’s Series D fundraising.”

While Ucommune’s valuation peaked at $3 billion in November 2018 when it raised $200 million in a series D-funding round, the market has seen a rough patch since then. The company said it expects a modest revenue decline this year due to the economic fallout arising from the Covid-19 pandemic.

Social distancing measures to curb the spread of Covid-19 emptied offices in the Asian financial hub, forcing financially troubled WeWork to pare its co-working space locations in Hong Kong. WeWork has now surrendered nearly 300,000 square feet (27,871 square meters) of space out of the 1 million square feet that it had taken on in the world’s most expensive leasing market since entering Hong Kong in September 2016.

Challenging Environment

“The longer government-enforced social distancing policies are enforced this year, the more challenging it will be for the co-working sector,” said Tim Armstrong, head of occupier services & commercial agency in Asia Pacific at Knight Frank. “The survival of co-working operators will depend on the strength of their tenant rosters and how well they are able to juggle their long-term rent commitments with depressed shorter-term revenue streams.”

Despite the challenging market environment, Ucommune is optimistic revenue will nearly double to RMB 2.1 billion ($301 million) by 2022 from RMB 1.18 billion in 2019. The company currently has 700,000 users across 211 locations in Greater China and Singapore.

Ucommune, which currently manages 686,000 square feet of flexible office space, said the merger will bolster the company’s growth initiatives.

Hoping to Expand at Home

“As a publicly listed company, we look forward to strengthening our market leading position and to expanding our footprint in China,” Mao said in a statement. “With smart technology and efficient business operations, we will continue to empower more members in communities across China, unleashing their potential and creating maximum value for society.”

While Mao keeps his eye on expanding in China, other co-working operators have been closing down mainland facilities in the face of rising vacancy.

In October of last year, developer Soho China announced plans to sell 11 of its Soho 3Q co-working centres in mainland China, although no sale has been realised to date. That attempted disposal came after one of Ucommune’s largest local competitors, Kr Space, closed six mainland locations in early 2019 due to financial troubles.

Still some analysts see promise in the sector beyond the current flexible office malaise.

“In the medium to long-term, enterprise demand should ensure the sustenance and growth of the co-working industry,” said Armstrong at Frank Knight. “Given the current economic uncertainty, companies would be hesitant to commit large capital expenditure for real estate and instead will be increasingly open to the idea of opting for a flexible workspace for their expansion needs, versus committing to a long-term lease arrangement.”

Ucommune was founded in 2015 and counts Sequoia Capital China, Matrix Partners China, Sinovation and Zhenfund among its early investors.