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Dixon cries `mea culpa' as he pulls Regus back at the last fence

MARK DIXON, the founder of Regus Business Centres, is a man that the media loves to love. The bike-riding Essex boy who made it good from his beginning selling sandwiches and hot dogs to walking tall as the king of the serviced-office market, certainly makes for colourful copy.

But today's headlines are a far cry from the usual flattering profiles that, right up to last Sunday, pitched his net worth at up to pounds 800m.

After a long weekend spent with members of the Regus board, Mr Dixon decided to pull the planned float of his fast-growing serviced-office business.

Instead of making his case this week to would-be investors at roadshow meetings, Mr Dixon is figuring out how to keep growing his business without the pounds 250m or so that the float should have generated.

"The sum total, bottom line?" Mr Dixon said yesterday. "It was my fault. I went too early."

The last-minute decision, which Mr Dixon described as the most difficult that he has had to take, raises two key questions. Why did potential investors back away from a deal to link up with a man with a solid track record for spotting business prospects? And where does the embarrassing reversal leave Regus?

A source close to weekend's decision-making said that although there was substantial interest in the offering, Regus was asking for too much to be taken on trust. "It is a very fast-growing business," the source said. "You can only value a business like this on discounted cash flow, but the question investors were saying was `Will this [business concept] continue to work in far-off places?'. They said `Prove it.'."

Regus, which provides ready-to-go office spaces for blue-chip clients around the world, has indeed recorded impressive growth since it was founded a decade ago.

Between 1992 and the end of last August, it expanded from 11 centres in six countries, to 211 centres in 42 countries. Underpinned by the float plans, Mr Dixon's sights were set on further growth in the United States and Asia. The year-end target was a portfolio of roughly 250 centres.

Last year, the company turned in a pre-tax loss of pounds 9.2m on turnover of pounds 111.8m. Mr Dixon - and advisers Merrill Lynch International - appeared to hope the float would value Regus at between nine and ten times its revenue, or roughly pounds 1bn. For a business in a new market, it proved to be an overly optimistic multiple.

Richard Balfour-Lynn, chief executive of property business Marylebone Warwick Balfour Group, which also provides serviced offices, said: "I'm not surprised [that the float was pulled]. It was highly ambitious to try at that level. If they had been more modest, they would have got it away."

Property market analysts point out that Regus has little in the way of assets to back its cash flow as its burgeoning crop of centres are leased, not owned outright. Should there be any interruption or slowdown to the stream of earnings, Regus's financial position could quickly lose its shine, they said.

It became clear yesterday, that potential investors had wanted at least another year's worth of numbers from Regus before they were willing to take the plunge.

"The question was, `You are a fast-growing business, you have grown for 10 years, can you continue that?'", Mr Dixon said. "I have decided that the company will be better placed to demonstrate its full potential to the market once the validity of its business model has been fully demonstrated in the new countries in which we have opened centres."

Also on potential investors' minds was a recognition that Regus is experiencing harsher competition as more players try to develop a presence in the serviced- office sector. As they muscle in on a market that Mr Dixon essentially created, everyone's margins are being squeezed.

Robert Hamilton, managing director at Instant Offices, which advises businesses on the serviced-office market, said: "Their margins were enormous at one stage. They [Regus] made the market. Now there is lots of competition coming in and that's no longer possible. It is very different now from just three years ago."

Mr Hamilton estimated that asking rates for serviced offices in the UK had fallen by about a third over the past three years. The new boys on the block include Mr Balfour-Lynn's MWB, which has about 30 business centres in the UK and wants to boost its presence across Europe. "The point was, it's one thing valuing on the basis of current cash flow, but what about cash flows in 2003?" Mr Balfour-Lynn said.

Analysts had pencilled in revenues of about pounds 200m for this year, but the numbers were harder to pin down further into the future.

The arrival of the new millennium, which some say may upset the functioning of the stock market, also played on the minds of those pushing the offer.

Mr Dixon says he still intends to bring Regus to market, probably next year. Present growth will be funded with extra debt and, possibly, the introduction of more strategic shareholders.

Before the Regus float was announced on 1 September, Mr Dixon arranged an extra pounds 100m in fresh debt in case things went awry. It proved a sound precaution. "I am approached from time to time by potential strategic shareholders," Mr Dixon said. "If they add value to the business, I will consider it."

He already has impressive backers, including Deutsche Bank, which took an 8.75 stake in the business last year. At the same time, Apollo Partners bought 7.2 per cent and Pelham Partners took 1.6 per cent.

Mr Dixon said yesterday he had opted to fund an employee share-option scheme in expectation of a future float.

Few doubt that Mr Dixon will eventually realise his ambition to bring Regus to the stock market, albeit at a reduced multiple. "I think that 9 to 12 months down the line, they will be back," Mr Balfour-Lynn said.

The man at the centre of the storm yesterday was looking for some more immediate comfort.

"A good bottle of red wine is what I need," Mr Dixon said.

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