Brookfield’s $3.7B IWG Bid: Here's What It Would Do With The World’s Biggest Flexible Office Company
Brookfield has until Saturday to either make a bid or walk away from a takeover of IWG, the world’s biggest flexible office company.
London-listed IWG, previously called Regus, in December said it had received a preliminary approach from a joint venture between Brookfield Asset Management and Onex, a private equity firm.
A takeover of IWG by Canadian firms Brookfield and Onex would be one of the largest investments yet in the booming flexible office sector, which has been electrified by the arrival of WeWork.
A deal would give Brookfield a massive platform in a sector changing the way people work. It would also be a chance for a good old private equity play of buying a company when its share price is depressed, turning it around and trying to sell it at a profit.
IWG did not disclose how much Brookfield might pay, but this week Bloomberg reported that a bid of around 300p a share was likely, valuing IWG at around £2.7B ($3.7B).
Peel Hunt analyst Andrew Shepherd-Barron said this could be cheap.
“IWG is a global brand with established positions in every significant country, where it has created local teams, many of which are at an early stage of scale economies, working to proven business templates across the full range of lease/management offer, supported by a cost effective back office,” he said. “It is highly cash generative and minimally financially geared given that leases remain off balance sheet. On many metrics it is good value.”
IWG’s shares were at a three-year low before the bid was announced in December. The company’s share price had fallen sharply in 2017, particularly after a profit warning in October where it stated that expansion in capital cities like London had not been as profitable as expected, partly due to increased competition.
But its earnings before interest, depreciation, tax and amortisation are expected to grow by almost a third to £487M over the next two years, according to Peel Hunt. In the same period its margins are expected to improve, but shares in the company had not reflected this. Peel Hunt noted that its price to earnings ratio — the measure by which listed companies are measured against each other — was low for a market leader.
Brookfield would essentially be buying one of the biggest companies in a growing sector at a price that does not factor in any future growth, Shepherd-Barron said, and that is before it even made any changes to the company and its strategy. The competitive environment might also ease.
“[The current share price] assumes that future margins are much lower than they have been in the recent past to reflect more aggressive competition,” Shepherd-Barron said. “But many in the industry question the sustainability of WeWork’s prices, given its high costs, hence in two-three years the competitive environment may have, at least partially, reverted.”
IWG has suffered in comparison to WeWork in recent years. WeWork is cool, young and hip, whereas the main IWG brand, Regus, has struggled to shrug off the negative connotations that surrounded serviced offices for many years — bland decor that felt like you could be anywhere.
But IWG is of a much larger scale than WeWork, in spite of the latter's $20B valuation. It has more than 3,000 locations worldwide compared to WeWork’s 283. In a 2017 interview with Bisnow, IWG Chief Executive Mark Dixon said scale will be key for flexible office companies as the sector expands.
IWG is profitable — as a private company it is not known if WeWork turns a profit yet. And as Shepherd-Barron argued, IWG moves its lease liabilities off balance sheet, while analysis of WeWork by Bloomberg indicates it does not, increasing the risk for the company if membership drops in a recession.
Shepherd-Barron said being a private rather than public company and having a big investor like Brookfield would give IWG the opportunity to accelerate its growth and invest in refreshing its properties, rolling out its more fashionable Spaces brand.
He said IWG under new owners could increasingly take a leaf out of WeWork’s book in terms of the kind of clients it targets.
“My guess would be that it would probably look to grow the corporate element of the business in a similar way to WeWork,” he said. “Increasingly big corporates will go to flexible office companies and say, 'I need to have 3,000 people in this part of the city, can you manage that for me,' and pay the provider a fee. That creates more sticky income and you can put a higher valuation multiple on that income and increase the value of the business.”
As one of the world’s largest property owners, Brookfield has a ready-made platform to help IWG expand in major cities around the world.
It could reanalyze IWG's expansion plans and/or retrench from less profitable offices or cities.
“Brookfield will look at the locations it is in and whether they have the potential to be profitable in a much less emotional way,” said Green Street Managing Director Peter Papadakos, who wrote an analysis of the profitability of flexible workspace last year.
There is also the potential for growth through consolidation of the myriad new co-working and flexible space companies that have sprung up as the sector has expanded. Dixon told Bisnow companies with fewer than 10 or so locations will likely struggle when the next recession hits, and Papadakos said the number of firms could drop by as much as 75% because of consolidation. A well-capitalized IWG would be well placed to lead this consolidation and pick off smaller rivals.
The deal is not final, and the metrics could change. Peel Hunt said it was expecting interest from other bidders, including real estate companies, which could drive the price up further.
But Papadakos said he does not expect traditional large office landlords like REITs to be bidders, in spite of the fact that flexible office providers were the biggest single new occupiers of space last year in cities like London.
“If you look at the companies that have bought flexible office platforms, it is the private equity firms with big property holdings like Brookfield, Blackstone and Carlyle,” he said. “From an investor perspective everyone is looking at this space, but the REITs we talk to would much rather partner with an expert operator and only one in Spain has bought a co-working company. You have to remember that flexible space is valued at a discount to traditionally leased space by investors.”
As to whether a deal happens, a lot will depend on whether Dixon is willing to stay on and run the company for new owners, Peel Hunt said. The Financial Times reported this week that Dixon, who owns 25% of the company, wanted to sell, while the rest of the company's board wanted to rebuff Brookfield's preliminary offer. Shepherd-Barron thinks a deal is likely.
“The approach announced could lead to IWG finally being taken over after a long and frequently volatile relationship with the equity market,” Shepherd-Barron said.