TALK­ING POINT

Gap be­tween man­age­ment ex­pec­ta­tions and what suit­ors will pay re­mains large

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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)

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