Outlook: Regus belly flop

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The Independent Online
PERHAPS IT is the influence of those crazy internet valuations, but all growth companies, and even some which are plain, bog standard, low growth enterprises, seem to be priced for Initial Public Offering these days as if they are highly prized works of art. Most of the time the investment bankers seem to get away with it, but there was a rude awakening yesterday when Martin Dixon's much hyped Regus business centres was forced to pulp the prospectus on the very day of publication. No way, the City had told Merrill Lynch, over the mooted pounds 1bn valuation.

The bicycling entrepreneur, Mr Dixon, magnanimously insists that the whole thing was his fault; with the benefit of hindsight, the company was trying to come to the stock market too early, he says. Yet some of the blame must surely lie with the bankers. It would have been they who, using discounted cash flow analysis, would have advised that it was possible to achieve such a valuation.

Most companies are valued on their track and earnings record. For Regus, that was never possible. In terms of record, Regus is still barely out of shorts, and in any case it has deliberately foregone profit in order to grow. Nor, given that the company has been roughly doubling in size every year, was it appropriate.

This rate of growth makes it more like an internet company than a provider of office space, but even Mr Dixon's powers of persuasion would surely have struggled to justify a "dot com" type share rating. Most property companies are valued on the basis of their net assets, but again this wasn't possible with Regus because it doesn't own any of the properties it rents out.

So Merrill Lynch fell back on the discounted cash flow method, even though it has never before been used to float a support services company. DCF is a dubious enough method even when applied to telcos and infrastructure projects. Just look what happened with Eurotunnel and, before they got their act together, the cable companies.

But with Regus's business, that of temporary conference and office space, it looks doubly problemsome. There's no doubting the appeal of the business model, or the energy and vision with which Mr Dixon pursues it. But as with every great new idea, the competition gets fiercer and the margins slimmer by the day. Furthermore, this is self evidently an activity more vulnerable than most to any business downturn.

In these circumstances, the discounted cash flow valuation method looks at best inappropriate, notwithstanding Mr Dixon's carefully charted roll out plans. Here's a question, then. If investors are not prepared to buy into Mr Dixon's success story, how come they are so willing to do so with internet companies, where the valuations are a good deal more fanciful and prospects are even more uncertain.

One possible explanation is that the internet sector is predominantly the plaything of retail investors, who are deliberately targeted in any internet IPO. No such retail offer was planned for Regus and the institutions knew there would be no such scramble for stock. More conventional valuation yardsticks and scepticism therefore came into play. It is good to see the City has not yet wholly lost touch with reality.