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Office giant IWG sells off Japanese business for £320mln

IWG, which used to be known as Regus, will provide TKP with services such as access to its sales platform and its operational technology, for which TKP will pay a fee linked to revenue
regus
IWG owns 130 flexible co-work centres in Japan

Serviced offices giant IWG PLC (LON:IWG) has sold off its Japanese business for £320mln as part of a strategic collaboration with TKP, the country’s largest provider of banquet halls and conference rooms.

City broker Peel Hunt said the fee was "extraordinary" and more than double even its best-case outcome.

Investors reacted in kind, with shares up 15% to 318.3p in early trading.

READ: IWG’s franchising strategy could see share price ‘more than double’

As part of the deal, IWG and TKP have entered into a master franchise agreement which will give TKP the exclusive right to use the Regus, Spaces and OpenOffice brands in Japan.

TKP will continue to operate IWG’s 130 offices in the country, while it has also committed to adding “significantly” to that figure over the coming years.

FTSE 250-listed IWG will provide on-going services and support to its Japanese partner, including access to its sales and marketing platform and operational infrastructure and technology.

In return for those services, TKP will pay a platform fee linked to system-wide revenues in Japan.

In 2018, IWG’s Japanese business generated underlying earnings (EBITDA) of £20.6mln on revenue of £94.4mln.

Move to partnership model

“Partnering and franchising are increasingly important elements of our growth strategy and TKP is an outstanding partner for IWG in Japan, with strong local expertise and leadership in adjacent markets and a complementary network of operations,” said chief executive Mark Dixon, who will take a seat on the TKP board as part of the deal.

“The transaction realises an attractive valuation for IWG's shareholders and re-affirms our strategy of capital efficient growth in IWG's global network with an increased emphasis on partnerships.”

The transaction is expected to close later this month, subject to clearance from Japanese competition regulators.

Proceeds from the sale will be used for general corporate purposes, IWG said.

Pleasant surprise for investors

“IWG has sold its first franchise for more than double our best-case estimate,” said Peel Hunt, which repeated its ‘buy’ recommendation in a note to clients.

“Japan only contributed 4% of group EBITDA (net of an estimate for its continuing contribution) yet has been sold for £320mln cash, more than 11% of group enterprise value.

“More sales will follow, which should further validate the new strategy, release substantial value and lead to a complete re-appraisal of the company. Special dividends or cash returns seem likely.

“Because this is only one transaction, we limit ourselves to increasing  our target price from 351p to 400p.”

--Adds share price and analyst comment--

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