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.

Start your day with The Independent, sign up for daily news emails
Voices
Homeless Veterans charity auction: Cook with Angela Hartnett and Neil Borthwick at Merchants Tavern
charity appeal
Sport
Amir Khan is engaged in a broader battle than attempting to win a fight with Floyd Mayweather
boxing Exclusive: Amir Khan reveals plans to travel to Pakistan
Arts and Entertainment
Strictly finalists Simon Webbe, Caroline Flack, Mark Wright and Frankie Bridge
tvLive: Simon Webbe, Caroline Flack, Mark Wright and Frankie Bridge face-off in the final
Sport
Ched Evans in action for Sheffield United in 2012
footballRonnie Moore says 'he's served his time and the boy wants to play football'
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

$200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

Carlton Senior Appointments: San Fran - Investment Advisor – Ind Advisory Firm

$125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...

Sheridan Maine: Commercial Finance Manager

Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Sheridan Maine: Regulatory Reporting Accountant

Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Day In a Page

Amir Khan: 'The Taliban can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'

Amir Khan attacks the Taliban

'They can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'
Homeless Veterans appeal: 'You look for someone who's an inspiration and try to be like them'

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Could cannabis oil reverse the effects of cancer?

Could cannabis oil reverse effects of cancer?

As a film following six patients receiving the controversial treatment is released, Kate Hilpern uncovers a very slippery issue
The Interview movie review: You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here

The Interview movie review

You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here
Serial mania has propelled podcasts into the cultural mainstream

How podcasts became mainstream

People have consumed gripping armchair investigation Serial with a relish typically reserved for box-set binges
Jesus Christ has become an unlikely pin-up for hipster marketing companies

Jesus Christ has become an unlikely pin-up

Kevin Lee Light, aka "Jesus", is the newest client of creative agency Mother while rival agency Anomaly has launched Sexy Jesus, depicting the Messiah in a series of Athena-style poses
Rosetta space mission voted most important scientific breakthrough of 2014

A memorable year for science – if not for mice

The most important scientific breakthroughs of 2014
Christmas cocktails to make you merry: From eggnog to Brown Betty and Rum Bumpo

Christmas cocktails to make you merry

Mulled wine is an essential seasonal treat. But now drinkers are rediscovering other traditional festive tipples. Angela Clutton raises a glass to Christmas cocktails
5 best activity trackers

Fitness technology: 5 best activity trackers

Up the ante in your regimen and change the habits of a lifetime with this wearable tech
Paul Scholes column: It's a little-known fact, but I have played one of the seven dwarves

Paul Scholes column

It's a little-known fact, but I have played one of the seven dwarves
Fifa's travelling circus once again steals limelight from real stars

Fifa's travelling circus once again steals limelight from real stars

Club World Cup kicked into the long grass by the continued farce surrounding Blatter, Garcia, Russia and Qatar
Frank Warren column: 2014 – boxing is back and winning new fans

Frank Warren: Boxing is back and winning new fans

2014 proves it's now one of sport's biggest hitters again
Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

Jeb Bush vs Hillary Clinton

Karen Tumulty explores the power dynamics of the two first families
Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

Stockholm is rivalling Silicon Valley

The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

Crucified Santa: Urban myth refuses to die

The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture