2. Regus is able to use its scale to purchase efficiently in areas such as centre fit-
out, telecoms, IT, office furniture.
A good illustration of Regus’ cost advantage occurred when Regus acquired MWB in 2013.
Regus was able to take out costs equivalent to over 10% of MWB’s revenue; essentially
MWB was operating a UK business half the size of Regus but with the same overhead.
The valuation for Regus is interesting because the true value of the business is hidden by
the fact the new centres take 2-4 years to get to full profitability as they fill up. In a period
of faster expansion, the profitability of the existing “mature centres” is concealed by the
early year losses of the new centres. It is not difficult to identify this because the
company is reasonably explicit about the true cashflow of the centres which have been
open for more than two years. We made some reasonably conservative judgements on
occupancy rates going forward, even assuming that the new centres opened in the last
two years only ever achieve 78% occupancy (a level it’s mature centres only briefly fell to
during the credit crunch) and found that we were able to invest in Regus on a single figure
multiple of the cash the business will throw off from its current estate, i.e. the business is
investable without further growth. But Regus is growing quickly: it continues to find high
return on capital growth opportunities throughout the world. The business is able to
redeploy its cashflow with a 20-25% return on capital.
We wrestled for a long-time with the cyclicality of the business. Profits fell by 75% in the
period from 2008 to 2010 and in the UK and EMEA, profits were virtually wiped out. We
learned that by 2008, the SPV structure had only been rolled out in the US, where profit
declined by around 50% and recovered quite quickly thereafter. The US experienced
some extreme rental price movements during the credit crunch, but Regus was able to
manage its relationships with the property owners to ensure that it did not take the full
hit of these market conditions – Regus was unable to do this in the UK where most of the
leaseholds were still recourse to the Group. The SPV structure is now in place across 90%
of its portfolio of centres. A 50% profit drop at the bottom of the cycle implies we are
investing at a high teens multiple of the cyclical low point – this is comfortable,
particularly for a business which we believe will be able to continue to grow with a 20%+
return on capital.
It is worth touching briefly on Regus’ history to explain why we think the issues the
company faced in 2000-2003 are unlikely to happen again. Mark Dixon’s initial foray into
serviced offices took little risk. He would take excess space from landlords with no
commitment and sell it on short leases with a services overlay. It was popular with both
tenants and the landlord. By 2000, the business had matured and in order to feed the
voracious appetite of venture funded Dot Com start-ups, the company had built out its
portfolio with multi-year lease obligations. When the bubble burst, Regus found that its
tenant base was largely made up of unprofitable companies many of which went bust.