IWG vs WeWork: completely different views of investors about rival shared office groups
WeWork’s $9 billion rise to prominence last month surprised at IWG’s main offices. Although larger and more profitable than the competition, IWG is valued at less than half that amount.
“The bottom line is that there’s no reason to revalue differently,” said one IWG insider. “We are too short or they are too tall or both.”
Just a few weeks later, Mark Dixon, founder, operator and owner of almost a third of the UK-listed shared office providers, published a strategic review aimed at making IWG the go-to more attractive to investors.
NS review is assessing the potential of splitting the business into three, separating the table-booking app from the rental business, and expanding its franchise, which is where Dixon believes the real growth can come.
“Clearly we need to simplify the presentation of the group. . . The question is, will this be easier for future and current investors? ” he say.
WeWork and IWG stand apart from other office companies in terms of their global reach and client base, and have historically adopted similar approaches.
“Basically, what WeWork is trying to do [when it was founded] 11 years ago nothing different from [IWG] Michael Donnelly, an analyst at Investec, did it 20 years ago: buy long-term leases, split and sell.
Both companies believe the pandemic will lead to more flexible working models and employers will be drawn to the short-term hires they offer.
But investors don’t seem to be treating them equally.
Founded in 1989, IWG has a long track record of profitability and steady growth. The company has a market capitalization of just over $4 billion, about 1.2 times its 2020 revenue.
WeWork, which has roughly the same number of desks but fewer offices and a more limited geographic reach than the competition, has chosen to grow at a faster rate and, therefore, has not yet turned a profit. It caused more than $6 billion in losses in the 18 months to mid-year.
But its $6.4 billion market cap is more than double the $3.2 billion in revenue it reported last fiscal year.
IWG’s share price has lost a third of its value during the pandemic. WeWork went as high as $13 in the days after it floated through a special purpose acquisition company at $10 a share – but has since fallen back to about $9.
“A lot of my investors can’t understand [IWG’s] valuation gap with WeWork,” said James Hanbury, partner and portfolio manager at Brook Asset Management, which is part of the Odey group and owns about 3% of IWG. He suggested that WeWork’s listing on the NYSE, which typically has a higher valuation than London, was a factor and that “investors were probably a little more enamored with Kool Aid with WeWork.”
Donnelly said investors are valuing IWG based on current performance, Obstructed by epidemic. The company issued a profit warning in June as occupancy at its offices failed to recover as quickly as expected.
However, he added, investors in WeWork are looking to the bright future envisioned by new boss Sandeep Mathrani, who has embarked on an effort to cut costs by $2 billion a year. ring – and SoftBank, the company’s Japanese backer.
WeWork this month posted a third-quarter net loss of $844 million but aims to record its first annual profit next year. It expects revenue to more than double to $7 billion by 2024. “People appreciate the fact that there’s growth,” said a person close to the company.
Investors choosing between the two groups are also betting on how people will work post-pandemic.
IWG has multiple locations in provincial and suburban areas, while WeWork focuses on central offices in major cities – one reason why IWG’s debt is higher than the competition.
Hanbury said the IWG “used to eat lamb for [suburban offices] is a responsibility, but post-Covid, this provincial and suburban network is extremely important.”
Dixon, and some analysts, are optimistic about a future in which smaller offices on the town’s high streets are part of any big boss’s plans.
“A lot of companies have a centralized parent ship approach to their offices and in the future this will be decentralized. IWG is a big game about that,” Hanbury added.
Investors are also buying into completely different cultures. Even after the departure of its larger-than-life cofounder Adam Neumann in 2019 and his replacement with more serious Mathrani, WeWork still harbors the energy of a fast-growing startup. high.
Meanwhile, Dixon “pays attention to detail in terms of costs, leases, markets, and profits.” [but] Hanbury said he’s not good at sugar coating from a presentation standpoint.
Finding a more attractive way to present IWG’s franchise business, through which local partners operate their offices while paying for the use of their brands, is another strategy to Improve the performance.
IWG’s current valuation shows “no one believes Dixon can successfully franchise,” according to a top shareholder in the company.
Franchise deals stalled during the pandemic but IWG Detached US investment bank Stifel said at the time that it would operate in Japan in 2019 for £320 million, a multiple with revenue implying a valuation for the entire business of £6 billion.
WeWork insiders have argued that there are other reasons the company may have attracted a higher valuation.
“Different product: higher quality furniture, slightly different environment,” said one.
However, a person close to IWG added that a smarter desk doesn’t necessarily mean a higher price tag. “What is valuable is the ability to convert your brand and what you do into cash flow. If you can’t, they [worth] nothing. It’s old-fashioned, but that’s basic economics. “