Gap between management expectations and what suitors will pay remains large
Failed IWG buyout shows yawning valuation divide
Flexible office space supplier IWG (IWG) this week walked away from possible takeover talks.
After months of speculation that saw the share price chased from below 200p to more than 325p, private equity firms Starwood Capital, Terra Firma and TDR have all been told by IWG management to take their buyout interest elsewhere.
This has not gone down well with investors and the stock has sunk back to 233.3p, including a 20% slump on 6 August. This is not the first time IWG has rebuffed buyout interest, with analysts at investment bank Berenberg believing that the company has effectively been ‘for sale’ since 2015.
The office rental market is going through significant change, partly driven by the runaway success of US-based serviced co-working rival WeWork. For a fixed monthly fee flexible serviced space providers offer reception facilities, meeting rooms, refreshments and the cheap internet access and calls needed by the thousands of small digital businesses that have emerged over the past decade.
IWG itself believes that flexible workspace is experiencing ‘its’ most exciting stage of growth in over 30 years,’ which is why it has been so keen protect its independence.
That IWG has now lost much of the takeover premium that had previously swollen the share price has left some market watchers to call the company ‘exceedingly cheap’ compared to WeWork.
The US firm generated 2017 revenues of about $900m, according to Bloomberg, which implies that it is being valued in excess of 22-times sales. That’s based on the implied $20bn valuation following a $4.4bn investment by Japan’s SoftBank earlier this year.
Many analysts had been anticipating offers for IWG in the 320p to 350p per share range, yet even at the higher end of that range it would put the company on just 1.3-times this year’s forecast £2.47bn of revenue.
What is really interesting for investors is that IWG generates significant profit and cash flows as well as top line growth. It also pays reliable dividends, the latest of which was up 11% year-on-year.
That’s very different to WeWork, which has yet to make a profit and still burns through millions of dollars of cash every year.
As Berenberg says, whether offers more in line with WeWork valuations ‘ever come is increasingly unclear,’ but it could certainly imply that IWG remains in play. (SF)