- Mark Dixon recently made comments that he is considering breaking up IWG into its component parts to unlock value.
- Jonathan Price argues that IWG is uniquely positioned to reap the benefits of the post-COVID world.
- Price argues that either IWG is worth more than $9 billion or WeWork is worth less than $4.6 billion, or at least one of those valuations is wrong.
Earlier in the year I penned a series of three articles about business valuation. Now, I return to the subject following IWG’s CEO, Mark Dixon, comments that he might break IWG up into its component parts in order to unlock value.
Dixon’s comment was, in my opinion, clearly born out of the frustration he feels at IWG’s substantial undervaluation, compared to the value of its over-hyped rival, WeWork. IWG’s current valuation sits at approximately £3 billion (US$4.6 billion), which is almost half of what WeWork is expected to de-SPAC for later this month ($9 billion).
Now, CEOs often claim that their company value is under-appreciated by the market, so by itself, Dixon’s claim is not something many would necessarily pay attention to.
But in this particular case, Dixon is right. IWG is, indeed, undervalued.
After all, why is IWG—which is around twice the size of WeWork—only worth half as much? This would imply that each IWG workstation is worth only one quarter as much as a WeWork one.
Can this (seriously) be true?
Let’s start by considering the views of those who think that IWG is not undervalued, but in fact, overvalued at the current share price.
Take for example Alex Newman, writing in Investors’ Chronicle on September 30th, under the headline, IWG bull case looks overbought – The flexible workspace provider’s shaky recovery does not warrant a sky-high rating.
Newman’s point is basically that the company is not forecast to return to the pre-COVID level of profitability until 2023 and that the current share price that represents 25 times forward earnings, which is unjustified.
Newman goes on to say that the recovery predicted by Dixon in March this year has been slow in coming and that the profits warning given in the trading statement two months later in June revealed some increase in sales in Q1 and Q2 2021; but a significant overall loss, despite £190 million in cost savings.
Newman is also pessimistic about IWG’s ability to negotiate lower rents from its landlords, noting that a like for like reduction of 6-7% was all that the company had managed so far. He is not alone in this view, noting support for the overbought hypothesis from brokers Berenberg and Peel Hunt.
So, how much is IWG worth?
If you ask me, the idea that IWG is worth only one quarter of what WeWork is worth is such utter nonsense that it defies belief.
In my opinion, IWG is worth more than WeWork despite the latter’s new management and despite the departure of messianic founder Adam Neumann and his fragrant spouse.
I base this opinion on several factors, including IWG’s quality of management, the track record of the company, the scale of the business, and its diversification.
WeWork’s management is frankly unproven in this business. They may turn out to be the best there is for coworking, but it is an uncertainty that should produce a value discount.
IWG, by contrast, has a CEO who has not only survived three major recessions, the dot.com crash in 2001, the global financial crisis in 2008-09, and the pandemic, but also has led his company more or less unscathed through them.
As for track record, IWG has demonstrated beyond dispute, I would suggest, that coworking is a sustainable business model. This point is worth making because it was not so long ago that this would have been disputed by many in the financial markets and in the real estate industry.
IWG has the longest track record and has shown the ability to grow and to evolve for more than 35 years.
IWG is also the biggest company in the flexible workspace industry. That matters because the single most important value creator in the flexible workspace industry is scale. Not only is IWG the largest, but it is also the most diversified, geographically and operationally speaking, thanks to its suite of brands.
As has been graphically explained in the various accounts written about the rise and fall of WeWork, WeWork had none of these attributes and was nothing more than a pumped up promote, full of sound and fury, and signifying nothing, as Shakespeare might have said.
It is absolutely clear to me that whichever way you look at it, IWG is worth more than WeWork, not the other way round.
So, either IWG is worth more than $9 billion or WeWork is worth less than $4.6 billion, or at least one of those valuations is wrong.
So, (again) what is IWG worth?
I am not an analyst, but I can see plenty of justification for a value of at least $6 billion (£4.5 bn) for IWG i.e., a 50% premium to its current share price, with WeWork being worth $4.5 billion, a 50% discount to its planned de-SPAC value.
I base that value on the fact that IWG is best placed to take advantage of the changes in work patterns that most experts predict will take place post-COVID. I believe IWG is best placed because it is physically there already with its coverage and its brands; and, unlike WeWork, it already has a strong presence in areas where people will want to work out from most—smaller cities and suburban locations.
IWG is also best placed because of the factors I mentioned earlier, the proven quality of the management and the track record.
With that being said, then, why are brokers so negative in their assessment of IWG?
Unfortunately, and I am sorry to say this, despite the huge improvement that has occurred over the last decade, brokers still appear to not really understand this business.
Alex Newman shows this in repeating one of the worst schoolboy howlers in his article when he says, “…flexible office space is more expensive – one UK workspace operator pegged it at typically three times the cost per square foot of a 10-year lease…” without recognising that he is comparing the price of apples with that of oranges, and that once everything included in the price is taken into account, flexible office space is little, if any, more expensive than conventional space.
The other major error that analysts make is to think that running a coworking business is easy, that any landlord who wanted to could do it and compete with IWG.
History has shown time and again that companies that enter the coworking business with that attitude do not survive their first recession. A coworking business has more in common with a hotel management business than a property rental business.
For those who know how to look at the flexible workspace industry, the conclusion is clear to see.
There are only two major companies placed to cater for the brave new world of work that is on our doorstep:
One of them is under-priced and the other is overpriced.