June 27, 2018 / 2:18 PM / 6 months ago

Takeover target IWG blames growing pains for profit warning

LONDON (Reuters) - Serviced office provider IWG (IWG.L) warned that profit would be hit by the cost of opening new sites and a weak performance in Britain, rattling investors who have been anticipating a takeover battle for the 2.9 billion-pound company.

Shares in IWG were down 2 percent at 317.7 pence on Wednesday afternoon after the London-listed business behind the Regus and Spaces brands cautioned that 2018 operating profit would be 15-20 million pounds lower than management had previously expected.

It comes as IWG, which is led by founder and chief executive Mark Dixon, weighs up approaches from four different suitors vying to take the FTSE 250 company private.

IWG blamed the profit warning on the cost of a bigger-than-expected expansion plan that will see it open 6.7 million square feet of new space this year, 17 percent higher than its previous guidance. The roll-out will require about 230 million pounds ($303 million) of investment, 30 million pounds more than it had originally forecast.

Difficulties at its UK business, which was built up through acquisitions and where the quality of IWG’s estate is more varied, are also dragging on profits.

Private equity houses Terra Firma and TDR Capital and U.S. firms Starwood Capital and Prime Opportunities Investment Group have all made competing takeover approaches for IWG in recent weeks and the profit warning could affect the price the bidders are willing to pay.

Interest in the workspace industry has been stoked by a $4.4 billion investment by Japan’s SoftBank in WeWork last year, which valued the U.S. co-working firm at $20 billion even though it is currently loss-making.

Some investors are betting that as working habits and employers’ needs change, demand for flexible offices will grow.

CEO CHALLENGED

Martin Hughes, the founder of hedge fund Toscafund, which is IWG’s second biggest shareholder behind Dixon, on Wednesday asked why IWG had not waited to expand until after a takeover deal had been agreed.

“You’ve elected to actually impact the short-term profit by pressing the growth button, which I’m finding hard to link-in with maximizing shareholder value in the sale process,” Hughes told Dixon on an investor call.

But the CEO said the plan to open more locations than expected was not a “short-term decision” and that “the takeover offers are there but we are very much trying to run our business as usual.”

While Dixon launched IWG in 1989, start-up WeWork was founded just eight years ago and is credited with updating the image of serviced offices by offering services such as beer on tap. The U.S. firm is posing growing competition to IWG.

One property-focused investment banker told Reuters that the American start-up’s rapid rise had encouraged takeover interest in IWG.

“Can you turn it into something like WeWork?” the banker said.

As well as the four suitors currently circling IWG, Lone Star also recently made a takeover approach but dropped its bid this month.

Canadian firms Onex and Brookfield pulled a joint bid for the serviced office provider at the beginning of February.

IWG also warned on profits last October, a downgrade it pinned on a slowdown in the London market and the impact on its business from natural disasters overseas.

IWG has not disclosed management’s original forecast for 2018 operating profits. Last year, they fell 12 percent to 163.2 million pounds, including joint ventures.

In May, analysts at Investec downgraded their forecast for IWG’s 2018 adjusted operating profit by 10 percent to 178.4 million pounds.

Starwood and TDR have been set a June 29 deadline by Britain’s Takeover Panel to make a firm offer or walk away from IWG. Prime Opportunities and Terra Firma must declare their intentions by July 21.

Reporting by Ben Martin and Paul Sandle; editing by Keith Weir

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