China's Ucommune acquired by US-listed SPAC for $765m

Investors in Ucommune include Sequoia Capital China, Matrix Partners China, Sinovation Ventures, ZhenFund, and Gopher Asset Management. AVCJ Research has records of numerous other backers. The most recent funding round in late 2018 – which came after SoftBank committed $3 billion to WeWork at a valuation of $43 billion and before the company went into freefall ahead of its planned IPO – saw $200 million committed by the likes of All-Stars Investment and CEC Capital.

Eighteen months prior to that deal, Ucommune joined forces with industry peer New Space in what was said to be China’s first co-working space merger. The combined entity was worth $1.3 billion.

Now the company has agreed to merge with Orisun Acquisition Corp, a SPAC led by Wei Chen, who has been making technology investments through her family office, Everpower International Holdings, since 2009, according to a filing. Orisun raised $40 million through an IPO in August of last year, starting the clock on a 21-month period – comprising 12 months plus three optional extensions of three months each – during which it had to complete a business combination or be disbanded.

When Ucommune filed for its IPO, founder Daqing Mao owned 35.27%. Following the merger with Orisun, Ucommune’s management and shareholders will receive $706.3 million worth of equity in the combined entity and hold a 91.8% stake. There is a performance-based earn-out for management. Orisun’s sponsors and its public shareholders will own 1.8% and 6.4%, respectively. They are contributing $44.8 million to the deal, with the sponsor receiving an equity rollover of $13.8 million.

Launched in 2015, Ucommune had 715,550 members as of December 2019, including 26,650 enterprise members. Around 94,000 workstations were available across 181 office spaces – with a further 30 under preparation – in 45 Chinese cities plus Singapore. The aggregate managed area was 7.38 million square feet, an investor presentation shows. It operates under an asset-light model, providing design, renovation, and management services for landlords who contribute most of the capital required to develop properties.

The company sought to diversify its business model through the acquisition of a digital marketing services provider in late 2018. As a result, the workspace leasing share of revenue fell from 93.4% in 2018 to 49% last year. It now works with over 700 partners to offer members a range of services, including advertising and branding as well as catering, healthcare, training, and entertainment. General corporate services are also available.

Frost & Sullivan estimates that China’s agile office space industry was worth RMB26.1 billion ($3.7 billion) in 2019, nearly three times the 2017 level. Rental and service revenue accounted for RMB20.6 billion and RMB5.4 billion, respectively. The market is expected to reach RMB132.3 billion by 2023, with services contributing 51%. 

Ucommune generated RMB1.18 billion in revenue last year, up from RMB448.5 million in 2018. Of the non-workspace leasing component, RMB518.6 million came from marketing and branding services. Management expects revenue to fall to RMB880 million this year as a result of the COVID-19 pandemic and then rebound to RMB1.35 billion in 2021 and RMB2.1 billion in 2022.

No details are given of Ucommune’s losses. The IPO filing from last year disclosed a loss of RMB572 million for the first nine months of 2019. The full-year loss in 2018 was RMB445 million, up 19% year-on-year. Much like WeWork, the company claimed that once its pace of expansion slows and existing locations are able to mature, revenues will grow and costs will fall, leading to profitability. However, it did not give a timeframe for the plan.

A SPAC represents a fast way to raise money, especially in a bull market, and avoid the wait for a liquidity event. From an investor perspective, it means giving money to a vehicle that has no existing business in the expectation that its sponsor can deliver deals through its networks.

Hedge funds are frequent subscribers to these offerings: investments are subject to a fixed timeframe; there is the potential for equity upside if they like the deal; and at a minimum, they can redeem on combination and recover their principal plus interest and some upside on the warrants. This means that, even if a transaction is approved, there can be substantial turnover in the investor base as hedge funds are replaced by long-only mutual funds.

Earlier this year, CITIC Capital launched a SPAC on the New York Stock Exchange to pursue deals under its One Belt One Road (OBOR) strategy. In 2019, TPG Capital sold Chinese hospital operator United Family Healthcare to a SPAC backed by New Frontier Group, an investment firm established by two former China executives with The Blackstone Group. Baring Private Equity Asia found a similar path to liquidity for education business Clarivate Analytics.

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• Topics
• Greater China
• Real estate
• Technology
• IPO
• China
• Sequoia Capital
• Matrix Partners
• Sinovation Ventures
• ZhenFund
• Noah Holdings
• All-Star Investments