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After the failed WeWork IPO, can this FTSE 250 competitor fare better?

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It has been impossible to read or hear the financial news over the past few weeks without coming across the failed initial public offering of the US shared office space company WeWork. For many in London and New York, this is a well-known brand that offers a good service; hence the shock when CEO Adam Neumann called off its IPO at the last minute.

On face value, one may have assumed that this is a negative sign for such shared office space companies, however the exact opposite may be true. While WeWork is now struggling to raise finance, its largest competitor, UK-based IWG (LSE: IWG), owner of the Regus brand, is seemingly strong.

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The difference

The main difference between WeWork and IWG from an investor’s point of view, is that IWG is actually making money – WeWork isn’t. Though it has become a familiar pattern in recent years for firms, particularly in technology, to be highly valued at an IPO before they have even turned a profit, making money is of course still the goal of all non-nationalised companies.

WeWork seems to have fallen into the same trap that a number of recent US IPOs have suffered, notably Uber, that of over valuation. The hype simply ran away with what sensible investors were willing to pay. This is combined, by his own admittance, with Neumann’s inability (and, I suspect, disinclination) to operate a public company rather than a private one.

According to IWG CEO Mark Dixon, the model behind WeWork’s main business is flawed. Dixon believes WeWork is not making enough income from other areas such as conference rooms and telephone services.

He said that the office space itself is a break-even business, and so money needs to be made elsewhere. He notes, “It’s like running a hotel and giving away the room service and having a free bar. You will have a very popular hotel but you won’t make any money”.

Regus going strong

This strategy, it seems, is working for IWG. Earlier this month Dixon said he had the goal of doubling revenue growth, which is already in the low teens, while in August there was talk of spinning off its US business – though WeWork’s failed IPO may slow this idea.

IWG runs a franchise model, similar to some hotels, where partners take on the risk of leasing buildings, but operate under the IWG brands. The company also emphasises spreading its offices across many towns and cities, not just large hubs – another contrast with WeWork, which is heavily focused on large cities.

With WeWork now in trouble after its failed IPO, struggling to raise finance and burning through more cash than it should be, its failures could also be to the benefit of IWG. At the simplest level, the fewer competitors there are, the better it is for the survivors.

At its current price, which is fairly high, IWG shares yield about 1.6% – not the greatest dividend – though this has grown by more than 11% per year for the last five years. It also has a forward looking price-to-earnings ratio of almost 38; again, quite expensive.

That said, if WeWork starts to get in real trouble, who knows what it could do for the IWG share price?

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We think it has the potential to become the next famous tech success story.

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Karl has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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