IWG tumbles as talks called off, profits fall 33%

IWG has called off the months-long talks with three suitors, Starwood, Terra Firma and TDR, as the serviced office company's directors believe none of them "capable" of buying the business for a price they could recommend to shareholders.

All three funds put out statements saying they did not intend to make an offer anyway, even though the trio were last month given a deadline extension to make an offer.

IWG, which used to be called Regus, also reported interim results, where group revenue was up 7.1% to £1.2bn, with growth accelerating in the second quarter, but operating profit fell 31% to £60.0m.

Profits were hit by increased investment in growth, including property, personnel and marketing, while the group also said it faced "further weakness in the UK".

In June, the company warned that full year profits would be roughly £15m to £20m lower than first expected as it sped up expansion plans to meet demand by spending £230m on 275 locations. Directors said they remained confident of delivering a full year result "in line with management's expectations".

Even though first-half profit before tax fell 33% to £54.3m and earnings per share by 30% to 4.8p, this bullishness was displayed in an 11% hike to the interim dividend to 1.95p per share.

Chief executive Mark Dixon said: "We remain very confident in the structural, long-term growth of the flexible workspace market and IWG's leading position within it. To fully participate in the market potential, we have made significant investments into our infrastructure, growth related resources and the continued development of our strategic corporate account activities."

He said global sales activity trends remain "strong" and the group had seen occupancy and price levels improve in the mature estate, where revenue grew 2.4% across the first six months of the year, up from 2.3% in the first quarter, while revenue from open centres increased 9.8%, up from 9% in the first quarter.

Capital expenditure of £130.1m during the period saw 2.8m square feet of space added from 132 new locations, with a further 275 locations, or 6.7m sq ft, costing around £230m in the pipeline. If all completed by the year end, that would see 22% more space added in 2018 than last year.

Dixon said the order book had been strengthened and he expected to see the benefit in the second half. "Our new openings in 2017 and 2018 are developing according to plan. As we reposition our UK business through talent and refurbishment investments, there will be a short term effect on revenue performance."

IWG shares fell 24% to 227.7p on Monday morning.

Broker Peel Hunt said: "Given that all bidders faced the challenge of gauging how much further the aggressive action of WeWork and others will go, before levelling off and, eventually, easing, and that earnings were recently downgraded, this was an exercise in catching a falling knife. The share price must now revert to a more “fundamental” value."

Following the profit warning a month ago, Peel Hunt analysts cut their profit before tax forecast for the full year and subsequent two years to £160m, £187m and £212m. "This was too high," they said on Monday, as the £54.3m half-year result was well below their £70m tentative forecast, requiring a further reduction to £145m, £175m and £200m, with earnings per share of 12.5p, 15.1p and 17.3p.

Neil Wilson, chief market analyst at Markets.com, said: "If you consider that IWG has been in talks with multiple potential partners but failed to agree terms with any of them; either it’s reflective of management’s confidence in the future growth or they’re holding out for too high a price.

"They clearly have an eye on the kind of valuation that WeWork enjoys and think they should be achieving something similar. But this corporate Penelope may be playing it too cool."