Outlook: Regus belly flop

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.

ebookA unique anthology of reporting and analysis of a crucial period of history
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Finance Officer

Negotiable: Randstad Education Birmingham: Randstad Education are seeking a Fi...

Accounts Payable

£12 - £15 per hour: Cameron Kennedy Recruitment: Excellent opportunity to join...

Technical BA - Banking - Bristol - £400pd

£400 per hour: Orgtel: Technical Business Analyst - Banking - Bristol - £400pd...

Account Management Strategy Manager

£38000 - £42000 per annum + competitive: Real Staffing: Required skills:Previo...

Day In a Page

A History of the First World War in 100 Moments: Peace without magnanimity - the summit in a railway siding that ended the fighting

A History of the First World War in 100 Moments

Peace without magnanimity - the summit in a railway siding that ended the fighting
Scottish independence: How the Commonwealth Games could swing the vote

Scottish independence: How the Commonwealth Games could swing the vote

In the final part of our series, Chris Green arrives in Glasgow - a host city struggling to keep the politics out of its celebration of sport
Out in the cold: A writer spends a night on the streets and hears the stories of the homeless

A writer spends a night on the streets

Rough sleepers - the homeless, the destitute and the drunk - exist in every city. Will Nicoll meets those whose luck has run out
Striking new stations, high-speed links and (whisper it) better services - the UK's railways are entering a new golden age

UK's railways are entering a new golden age

New stations are opening across the country and our railways appear to be entering an era not seen in Britain since the early 1950s
Conchita Wurst becomes a 'bride' on the Paris catwalk - and proves there is life after Eurovision

Conchita becomes a 'bride' on Paris catwalk

Alexander Fury salutes the Eurovision Song Contest winner's latest triumph
Pétanque World Championship in Marseilles hit by

Pétanque 'world cup' hit by death threats

This year's most acrimonious sporting event took place in France, not Brazil. How did pétanque get so passionate?
Whelks are healthy, versatile and sustainable - so why did we stop eating them in the UK?

Why did we stop eating whelks?

Whelks were the Victorian equivalent of the donor kebab and our stocks are abundant. So why do we now export them all to the Far East?
10 best women's sunglasses

In the shade: 10 best women's sunglasses

From luxury bespoke eyewear to fun festival sunnies, we round up the shades to be seen in this summer
Germany vs Argentina World Cup 2014: Lionel Messi? Javier Mascherano is key for Argentina...

World Cup final: Messi? Mascherano is key for Argentina...

No 10 is always centre of attention but Barça team-mate is just as crucial to finalists’ hopes
Siobhan-Marie O’Connor: Swimmer knows she needs Glasgow joy on road to Rio

Siobhan-Marie O’Connor: Swimmer needs Glasgow joy on road to Rio

18-year-old says this month’s Commonwealth Games are a key staging post in her career before time slips away
The true Gaza back-story that the Israelis aren’t telling this week

The true Gaza back-story that the Israelis aren’t telling this week

A future Palestine state will have no borders and be an enclave within Israel, surrounded on all sides by Israeli-held territory, says Robert Fisk
A History of the First World War in 100 Moments: The German people demand an end to the fighting

A History of the First World War in 100 Moments

The German people demand an end to the fighting
New play by Oscar Wilde's grandson reveals what the Irish wit said at his trials

New play reveals what Oscar Wilde said at trials

For a century, what Wilde actually said at his trials was a mystery. But the recent discovery of shorthand notes changed that. Now his grandson Merlin Holland has turned them into a play
Can scientists save the world's sea life from

Can scientists save our sea life?

By the end of the century, the only living things left in our oceans could be plankton and jellyfish. Alex Renton meets the scientists who are trying to turn the tide
Richard III, Trafalgar Studios, review: Martin Freeman gives highly intelligent performance

Richard III review

Martin Freeman’s psychotic monarch is big on mockery but wanting in malice