Real Estate

IWG bid talks came close — so could WeWork something out?


When you are trying to sell a property, nothing is worse than seeing the place across the road go for a fortune, while your own gaff attracts only timewasters — and a slow realisation dawns that the extension needs more spent on it. That is pretty much what has happened to Mark Dixon, founder of serviced office provider Regus, now known as IWG.

After US rival WeWork was valued at $20bn by its SoftBank backers, Mr Dixon spent all summer talking to three private-equity groups about offers for IWG — during which time he had to issue a second profit warning in eight months, after unplanned investment in extra space. Then, on Monday, he gave up on his talks with Terra Firma, TDR Capital and Starwood, sending IWG’s market value down 20 per cent, to £2.2bn.

IWG said none of the interested parties could come up with “a recommendable price”. So, is Mr Dixon just another deluded property owner, holding out for a valuation that has been and gone? One analyst suggested as much, having also read the group’s first-half results: “The argument from . . . IWG that a series of bids undervalues the company holds rather less water when the company has just announced a near-30 per cent decline in operating profit”. Another noted that the market was hard to read, with WeWork still moving in to new properties, while “earnings are in a downgrade cycle”.

However, Mr Dixon may yet secure a sale — without having to do too much to his premises.

As argued by the Financial Times Lex column, if IWG wanted to look more like WeWork, it could simply close offices in smaller locations, raise prices and refurbish more interiors. It has that flexibility, as it guarantees only £120m of property leases compared with WeWork’s $1.9bn.

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But it doesn’t need to. Its large format co-working offering, called Spaces, looks exactly like WeWork, is already nearly half its size and — unlike the $20bn US group — makes a profit in its own right. In fact, the whole IWG business has more than 10 times the office locations of WeWork, in nearly double the countries, and — at £150m — an incalculable multiple of its lossmaking rival’s pre-tax profit. Although IWG’s results show this profit was down 33 per cent in the first half, full-year guidance was maintained.

IWG could also enhance its valuation in other ways. Those close to the bid discussions say the process flushed out several potential partners, with whom new growth ventures might be explored.

But again, it probably doesn’t need to — as one of two things will probably happen in the six months before the bidders can return. Either the market will decide IWG’s profit is undervalued, prompting a better bid price, or it will realise WeWork’s losses are overvalued, potentially making a similar bid price more “recommendable”.

Three months of talking indicates the price was very nearly right — no-one gives up their summer to chase a property sale if it isn’t.

Spire: doctors’ orders

Lombard recalls (but dares not repeat) a dreadful ‘Doctor, Doctor’ joke in which a patient with a minor ailment is advised by a hard-of-hearing physician to “just pop your clothes on the chair, and we’ll take a look . . .”

However, such a dubious approach to diagnosis may feel familiar to investors in Spire Healthcare. On Monday, they were told by the private hospital group that full-year profit would take a turn for the worse — but the problem was one of visibility, not audiology. A cut in revenues from the NHS, for which Spire provides treatments, and some rising costs, would mean earnings were “materially lower”.

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Spire could not say — or see — how much, though. This would arguably be a more worrying trait in a doctor, but it is still not exactly reassuring coming from a chief executive. ”It is never a good sign when a company can’t quantify just how bad things are,” noted one analyst.

Nor was Spire’s diagnosis entirely convincing. Despite a 9.5 per cent fall in NHS revenues, these account for only a third of the total — the rest is from insured or “self-pay” private patients — so group revenue declined only 1.1 per cent in the first half. How could that cause an unquantifiable hit to earnings? “Investors are likely to question how the cost base has been so poorly forecast . . . to result in such a material miss,” said another less-than-patient analyst. Some were tempted to self-diagnose — and estimate a full-year earnings downgrade of 10 per cent to 15 per cent.

Thankfully, Justin Ash, Spire’s clear-sighted chief, was on hand to explain that the costs should be one-offs to improve quality and training in the hospitals — and his main difficulty was knowing whether second-half NHS revenues could make this up. Revenues from self-pay should improve but Mr Ash admits missing double-digit growth targets in the first half.

If anything, then, he was being honest in his inability to provide a clear prognosis. It’s now a question of whether investors are willing to apply the balm and wait a few months to see if it all clears up.

matthew.vincent@ft.com



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