In its glossy annual report released in March this year IWG says it is “leading the flexible workspace revolution”. This, of course, is a subjective claim but one that Tempus would claim is false. A better description would be that IWG is madly scrabbling to catch up with a revolution that it noticed too late.
IWG is the owner of Regus, the world’s biggest serviced officer provider. And it really is big. Regus operates in more than 110 countries and over 1,000 towns and cities, from Chelyabinsk in Russia and Phnom Penh in Cambodia to Addison in Texas and Weymouth in England.
Size does not always mean success, however. Yesterday the FTSE 250 company issued a surprise profit warning, informing the market its operating profit would be £15 million to £20 million lower. This was its second such warning in eight months and comes after a tough 2017 when profits fell 14 per cent, causing shares to fall sharply. The profit warning comes in the middle of a four-way bidding war for IWG, and sent shares down 2.8 per cent to 315p.
Mark Dixon, chief executive and founder who holds a 25 per cent stake, said about three quarters of the expected fall in operating profit was due to it buying more locations and refurbishing more of its existing stock, in a £230 million spree.
This in itself is a rather odd move when the company is being considered as a buying opportunity by the US investment firm Prime Opportunities, TDR Capital, the British private equity fund, Starwood Capital, an American property investor, and Terra Firma, the private equity group. Surely it makes sense to maximise shareholder value and let the bidding war run its course before pushing the growth button?
The other reason for the fall is due to weakness in the UK market, which IWG says is not performing to management expectations, especially in London. This is where the alarm bells should be ringing.
Every other British property company worth its salt is moving towards setting up a flexible office offering, so it is bizarre that this is occurring when IWG is saying the market is stagnant. British Land has launched a platform called Storey, Great Portland Estates is testing flexible and short-term leases, Teddy Sagi, owner of Camden Market, has launched office provider Labs, and the Crown Estate has just opened up 350 co-working desks in London.
There is an argument to say IWG is simply struggling to attract the right type of customers. That, Tempus believes, is due to its image, or the image people hold in their minds. There is a feeling Regus simply does not have the “it” factor, and has associations of drab meeting rooms, wilted potted plants and clunky desktop computers.
A bigger contender for the claim of leading the revolution is Wework, the New York company that went to town on offering spaces rented by the day or hour to start-ups and entrepreneurs, then making the internal decor really cool, and adding in factors such as networking events, fitness classes and communal spaces that allow businesses to swap ideas. None of this in itself was particularly revolutionary, but it expanded rapidly while Regus was asleep. IWG has since launched its own trendy co-working brand and has 78 Spaces locations across the world, but it is having to play rapid catch-up.
This suggests that IWG may struggle to ever gain the “cool” factor and could cause problems whether it secures a buyer or not. Two profit warnings in eight months is likely to be considered by any potential suitor. With shares at 315p, it seems a better idea to sell now before waiting to see what deal is placed on the table.
ADVICE Sell
WHY Two profit warnings in eight months and a slowdown in UK suggests buyout deal will not be as strong as management hopes.
Bunzl
For a business that has expanded over the years through relentless bolt-on acquisitions, there was a surprise announcement in yesterday’s trading update from Bunzl (Alex Ralph writes).
The international distribution and outsourcing group said it had recently sold its marketing services business in the UK. The division generated annual revenue of £46 million but has been deemed surplus to requirements as management found there were limited opportunities to build the business overseas.
The FTSE 100 company was founded in 1854 by Moritz Bunzl as a haberdashery business in Bratislava, and it now distributes everything from packaging and labels for grocers to gloves and swabs for healthcare.
Much of the rest of its short update for the six months to the end of June were as expected.
Bunzl said trading had been consistent with levels reported at its first quarter in April. Group revenue is expected to have risen 11 per cent over the six months at constant exchange rates, with underlying growth of about 5 per cent. Currency headwinds knocked about 6 per cent off its growth. The slower underlying growth was due to the boost in 2016 from a US grocery contract that has now worked through.
On acquisitions, an area synonymous with Bunzl, it has committed to spend about £105 million in the year to date. This is a marked slowdown on the £616 million spent in its last financial year to buy 15 businesses. Given that was twice its previous record of £327 million in 2015, the drop was unsurprising, although Jefferies said the lack of further deals may disappoint the market. The broker also cited the lack of an update on operating margins as another issue. The shares were down 1.3 per cent to £22.62 yesterday. They have rallied strongly since hitting a low of £19.36 in March and are favoured by the bulls for Bunzl’s reputation for increasing the dividend. They trade on an expensive 18.6 times 2018 earnings multiple. Sentiment has been weakened by uncertainty over the potential of Amazon Business to eat Bunzl’s lunch.
ADVICE Hold
WHY Reliable acquisition-based strategy that has delivered dividend rises
