Bid speculation is ever-present but Regus owner IWG stays unattached

Few companies are as restive as IWG. The Regus office owner has been a three-decade work in progress as founder Mark Dixon tries to tease out hidden value that’s often visible only to him.

An approach from buyout group CC Capital adds another chapter to its convoluted corporate history. This time the story was dead on arrival: CC said on Tuesday that it had no plans to make an offer, which barring further developments puts the New York-based firm on the sidelines for six months. Sky News had revealed CC’s approach overnight but, according to people familiar with the situation, the interest had cooled by the time IWG delivered a profit warning three weeks earlier.

After a brief spike higher, IWG shares settled back to around 300p, a level they first hit a month after flotation in 2000. Analysts at Davy Stockbrokers reckoned that Dixon was unlikely to entertain offers below a pre-pandemic record high of 469p, which valued the business at £4.7bn. He may be in for a long wait.

To understand why requires a step back.

Flexible office space has been a popular bet among those looking for post-pandemic winners. The theory goes that companies will swap long-term leases for something more suited to hybrid working.

Early signs have been supportive: WeWork recently revived flotation plans on the back of its best net desk sales since September 2019. IWG has a much broader network than its US rival, so may be better placed for a hub-and-spoke vision of the future where workers commute to suburban satellite offices rather than the inner city HQ.

Dixon has never disguised his irritation at WeWork’s fantastical valuation. SoftBank’s backing of WeWork at a pre-money value as high as $42bn in 2019 coincided with an attempt to publicly auction IWG, which attracted interest from four private equity funds but failed to drum up an acceptable offer. A few months earlier Brookfield Asset Management and Onex had their $3.7bn bid approach knocked back.

His frustration is understandable. Though WeWork’s light has dimmed, its float via a special purpose acquisition vehicle later this year will be at a value of $9bn, approximately twice IWG’s current market capitalisation. Yet IWG is bigger by nearly every measure.

IWG’s more than 3,300 business centres easily eclipse WeWork’s network of 851. IWG beat WeWork for revenue last year, at $3.4bn versus $3.2bn, which resulted in losses of $800m and $3.8bn respectively. And while expansion required WeWork to burn through $7bn in the previous four years, IWG made a $500m cumulative profit.

So why are investors backing WeWork to win the space race? In part it’s because the US group has been using its millennial-friendly brand to take a lead in signing up franchises and licensees.

IWG first revealed an asset-light franchise model two years ago with the sale of its Japanese business but progress since has been grindingly slow, with no deals announced since November 2019. The company therefore remains hostage to operational gearing, as demonstrated by the recent profit warning.

Just six weeks after talking of green shoots, Dixon had to slash earnings guidance because an occupancy shortfall since April was hitting high-margin revenue such as meeting room hire. It reinforced his reputation for ungrounded optimism has long been a problem for investors, as well as presenting a potential hindrance for franchisees who have to buy into the company’s ambitious expansion plan.

To a pessimist, IWG is exhibiting the same fundamental weakness as it did in 2002, when the deflation of the dotcom bubble caused a near-death experience. The biggest change since then has been the emergence of WeWork, whose float delivers another $1.3bn to burn in pursuit of a target to more than double revenues by 2024.

At the same time, IWG’s ambitions are being hemmed in by debt covenants that management recently renegotiated but has been reluctant to discuss in detail. A step back to private ownership has obvious appeal — albeit it can only happen at the right price, which demands evidence to underpin Dixon’s uncontainable optimism.