Mark Dixon on how IWG aspires to be the IHG of the serviced office market

IWG’s business model will evolve into something akin to the structure of InterContinental Hotels Group, says chief executive Mark Dixon, fresh from inking a £320m franchise deal in Japan. “We’re franchising the same way that McDonald’s do,” he says. The deal will see Tokyo Stock Exchange-listed TKP Corporation acquire 100% of the shares of Regus Japan Holdings, which includes taking over the leases and operation of IWG’s 130 centres in Japan, as well as gaining the exclusive rights to the use of the Regus, Spaces and OpenOffice brands in the country. TKP will have access to the back-office “guts” of IWG’s business, such as its large reservation system that operates 24 hours a day from three booking centres. It is the first of several such deals Dixon is working on, and he says he expects a “steady stream of news” to come from IWG over the course of 2019. Partnership power Earlier this month, the group signed deals with four new franchise partnerships in the UK, which it hopes will add at least 30 new centres to its 320-centre UK portfolio over the next three to four years. The new UK franchise partners include Kash Group, which will launch 10 centres in South Oxfordshire and Bedfordshire; AMA Workspaces, which will open five centres in south-west London; SME Group, which will unveil 10 centres across north-west London; and Q-Boid, which will open five centres in Northamptonshire. The decision to franchise off parts of the business follows the firm’s appointment of Rothschild in March to advise on its options. The firm said it would be carrying out selective closures of centres after its pre-tax profit fell by 7% to £139m in the year ended 31 December 2018, with its net debt increasing from £296.4m in 2017 to £460.8m. Dixon admits that “some centres aren’t working”, but adds they were “very sporadic occurrences”. IWG has a five-yearly refurbishment programme and is spending around £90m a year on updating its centres, but Dixon says some of the closures and issues have been caused by the buildings’ owners “not investing in the buildings, which start to deteriorate”. “Buildings get past their sell-by date,” he says. New future IWG’s future is looking very different to last year, when several takeover approaches were made, including from Canadian private equity firm Onex Corp and Brookfield Asset Management, US real estate investor Prime Opportunities and private equity firms Lone Star, Starwood Capital European Operations, TDR Capital and Guy Hands’ Terra Firma. When those takeover approaches came to nothing, the business began exploring a sale-and-leaseback of its real estate. At the time, it owned £150m of freehold assets, all of which sit in the UK. Then Dixon began exploring a franchising model and the spinning off of IWG’s real estate portfolio. He expects this approach to create more value and spur growth for the business. In the 30 years since Dixon founded the original business, the serviced office market has become congested with a glut of providers entering the sector. WeWork has more than 3.4m sq ft in London, while the Crown Estate, British Land and Landsec are all now providing their own serviced office offerings. Dixon welcomes the competition. “You wouldn’t just have one hotel group globally,” he says. But he points out that recession or no recession, there is likely to be some consolidation in the sector. “It’s one question of people being able to make a return but another to run this type of business successfully,” he says. “People will claim they’re doing something different, but pretty much everyone is doing the same thing.” It remains to be seen whether Dixon’s franchising plans can return IWG to profit and create value and new growth, and whether this approach will differentiate IWG from the rest of the pack. IWG at a glance IWG’s brands comprise Regus, Spaces, HQ, Signature by Regus and No18. Its market cap is £3bn. IWG’s Japanese business contributed £94.4m to the group’s revenue and generated EBITDA of £20.6m in 2018. The total gross asset value of the divested business at 31 December 2018 was £98.3m. TKP is the leading provider of conference rooms and banquet halls for rental in Japan, operating from 249 locations across the country. To send feedback, e-mail louise.dransfield@egi.co.uk or tweet @DransfieldL or @estatesgazette