Yet Another Value Podcast - Swen Lorenz from Undervalued-Shares on $IWG

Episode Date: April 4, 2022

Swen Lorenz, founder of https://www.undervalued-shares.com, discusses his thesis on IWG. IWG owns a variety of co-working brands that compete with WeWork, and Swen believes IWG's scale, cheap valuation, and variety of catalysts makes them a terrific value investment.Note: We had some connectivity issues on Swen's side during the podcast; I tried to edit the best I could but ultimately it was either release as is or not at all! Hopefully it's not too much of a bother!My IWG Notes: https://twitter.com/AndrewRangeley/status/1509521982953558024?s=20&t=qUBbtL3_y1G8geiQ4tIFdAChapters0:00 Intro1:15 IWG Overview3:00 IWG versus WeWork6:00 IWG's scale11:00 How valuable is a network for co-work spaces?16:20 Why does IWG's multi-brand model make more sense than WeWork's one brand?18:55 IWG's burgeoning franchise model25:20 The recovery from COVID29:00 IWG's pandemic performance33:00 IWG's growth plans36:00 IWG's tech acquisition and spin off plans41:30 Why has IWG been hit so much harder than office-space peers?

Hello and welcome to the yet another value podcast. I'm your host, Andrew Walker. And with me today, I'm excited to have Sven Lawrence. Sven is the founder of undervalued shares.com. Sven, how's it going? Good. Hi, Andrew. Very good to be with you. Looking forward to our chat now. Hey, I'm looking forward to it too. Let me start this podcast the way I do every podcast. First, a disclaimer to remind everyone, nothing on this podcast is investing advice. Everyone should please do their own work, consult a financial advisor, all that. And then second, with the pitch for you, my guest, I've been a subscriber to Undervalue Chairs. I'm going to say for nine months, and I've been loving it.

You and I traffic in the same situations, it seems, you know, John Menzies, which we were talking about before the podcast, I don't think I'd mentioned anywhere else, but you did great work on that, and that had a little mini bitty more, which was awesome. But, you know, recent write-ups, Burford, right up my alley, previous podcast on that, Twitter, write up my alley, and the stuff we're going to talk about today, IWG. So, you know, I'll include a link in the show notes. It's a very reasonable subscription. People can go and look at that if they're interested.

But let's turn into the stock we're going to talk about today. The stock is IWG. This is a London listed stock. Their best, well, I won't even say what their best name for. I'll just turn it over to you. What is IWG and why are we so interested in them? IWG is a company that many of you might know by the name of Regis. It was listed as Regis for about 16 years until it changed its name.

It's a flexible office-based provider. It's basically WeWork, but unlike WeWork, it's been around for a long time already since the mid-90s, and it's been profitable. I think that's the number one difference that sets it really apart from WeWork. In a way, you could say it's the original WeWork. It's also much bigger than WeWork. So right now, off the top of my head, WeWork, I think, has about 900 office centers, and IWG has about 3.5,000. The company has offices in 1,100 cities in more than 100 countries. So it's a truly global office provider.

And you can rent office space in there, literally by the month, by the day, you can get meeting rooms, desks, entire office solutions. You can go there if you're a startup or you can go there if you're an international, large corporation. And the company is still run by its founder, who's also the major shareholder, Mark Dixon. He owns 28% of the company. He is by now a billionaire, just about. He resides in Monaco. It's a bit of a funny setup. the company is listed in London, its head offices in Switzerland, its CEO lives in Monaco,

and it's got some exciting growth plans, which you know, you wrote about as well. So I think some of your followers will be familiar with it already. Yeah, look, this was right at the, you know, kind of the April, May, March 2020 time, this was actually one of my favorite ideas. I just thought we'll talk about all the reasons, but I thought this stock was going to be a killer. and it's funny, you know, I've only been following it loosely since then, but it probably hasn't performed quite as well as I would have poked. The only other thing I'll mention, you mentioned the WeWork comparison, which I think is going to come up a lot during this

podcast. But it is interesting. You're back in 2016, 2017, we work, this was before it fell, right? And everyone was talking about WeWork, and I remember they would have Investor Days, and the CEO would come out and be like, look, everything WeWork is doing right now. I can't remember if they went bankrupt or almost went bankrupt during the dot-com crash, but they were like, Everything WeWork is doing right now is exactly what we did during 1998, 1997. It ended in tiers for us then. I'm just telling you guys right now it's going to end with tears for WeWork. And, I mean, he couldn't have been proven more correctly.

So let's say, I guess there's lots of places we can start. But I'll give it to you. Where do you think we should start when we talk about? Obviously, you think IWG is undervalued. You're interested at where do you want to start with it? So, I mean, since you just spoke about WeWork, we could also briefly talk about what really sets it apart. And you mentioned one very important aspect.

So during the dot-com boom, we work almost went bust. And since then, the company has put in place something that is very fundamental to my investment case. Every single office center that IWG operates is ring-fenced. So if one of these office centers goes bankrupt, it has a negligible or zero impact on the mothership. And that is something that I believe is extremely valuable. And the market hasn't quite fully understood yet. So during the pandemic, during the famous March 2020 crash and the subsequent lockdowns, obviously the company was also suffering because tenants couldn't get into the office

centres anymore. They weren't paying rent. There was a question, is this going to be a repeat of the early 2000 situation when IWG back then still Regis almost went bankrupt? And the clear answer is not. No, because the company has very strong finances. It's got a based on normalized years. It's got a EBITDA to debt ratio of less than zero.

It's got $8 million in the bank in cash. It's not very highly leveraged. And it's basically ring-fenced against bad situations such as the one that we've lived through recently, which is why it's so different than we work. There's an owner who's been through it all already. and he wants to use a crisis like this as an opportunity, which he's been able to because he's currently really beefing up his growth plans for the 2020s. And I believe it's among the large flexible office providers that are listed on the stock market.

It's the much more safe and reliable growth story for the 2020s. And that's one of the key reasons why I got interested in it. Yeah. Let me dive there. I hate to compare so much to WeWork, but look, WeWork is the name everyone knows. WeWorks the brand. And I post this in my notes.

We work on their earnings call. I was just reading it as it was perfect for this. And they said, hey, we think we're the only, we work said this. We think we're the only people who can kind of meet enterprise office people, their needs at scale. You know, an IBM, a Microsoft, whoever, we're the only person who can meet their demand worldwide.

And I read that. And I was like, as you said, IWG owns 3.5 locations versus 7 to 900 for WeWork. And I was like, Regis, you know, IWG, they're profitable. WeWork is way unprofitable. Like, they're so much bigger. So the first question I want to at, let me expand on that a little bit, actually. You know, I have a flex office space.

I always take this podcast from my apartment for people who are familiar with the background. But I rent a WeWork space, right? And we just renewed our lease. We'll probably talk about pricing in a little bit. But when we renewed, when we got our lease, I've been with We Work five years, me and the person who I share an office space with, we always go we work. And I do just wonder, is we work right, like that mind sure that they've got. You know, there's the Apple TV, WeWork, We Crash Show or whatever.

They've just got so much mind share. Do they have a sustainable advantage over Regis because of just that mind share? And I want to dive into the brand a little more in a second, but I'll turn that over to you. I think it's a bit like speaking about British Airways in Ryanair. They're two very fundamentally different propositions. and I don't think one is better than the other. It's a very large market. And speaking of market size and obviously a firm like we work in particular,

loves the whole total addressable market. So even just 10 years ago, flexible office base made up about 1.5% of the entire office market. It's now grown to 5%. And because of everything that has happened in the last two years since we had these lockdowns and the various situations that resulted from it, large corporations and just about everyone else has latched onto the idea of flexibly. office space and hybrid working has become much more a thing. Large corporations are now switching to what they call a hub and spoke model where they do keep an headquarter, but they rent more

flexible solutions for their staff elsewhere. And now the projection is that during the 2020s, the market share of flexible office space providers is probably going to grow from 5% to 25% or 30%. I mean, these are obviously long-term projections and this is all a bit of a guesswork. But I don't there's anyone out there who's got any doubt that this market is growing by leaps and bounds over the next couple of years because it's not just the startups anymore that go into flexible office spaces it's now the large corporations as well and in terms of what we work has more um of the more mind share or whether the brand is stronger it's probably like you know Coca-Cola and Pepsi or like McDonald's and Burger King, Hilton Hotel and Marriott, you know,

asked three people about this and you get different opinions. Everyone has their favorite brand. I, you know, speak of Mindshare and brand recognition, I once tried to get a WeWork membership myself. And I wrote in my report that I tried six times. It was, I went to an office center twice. I sent them two emails and I called them twice. And no one there was able to actually signed me up for membership. It was, I mean, it was an absolute shit show in terms of customer experience. I said it at the beginning that I'm trying to renew our, our we work lease right now. And I will tell you the, it is just, their pricing systems and they're billing, it is so insane how ridiculous it is and the customer service. It's really crazy in there. It reminds

me of dealing with almost a government bureaucracy, how poor some of the stuff in the customer services and some of the decisions just don't make any sense. But neither here nor there. Please continue. Yeah. So that was actually why I ended up with IWG with Regis. And I am an extremely happy customer there. And for me, what makes a difference? So I'm a, I live a somewhat nomadic lifestyle. So I really appreciate the fact that I can go to 1,100 cities around the world. And there will probably be an office space for me, which is something that we work can't offer. Now, for you that might not be relevant, because you might not travel as much as I do. And you're not an international cooperation with staff all over the world. Not yet. No, you will get me, I'm sure. My wife is, she's working from home today and she heard you say you don't travel as much and she's laughing at me right now. Oh, okay, did I get that wrong? No, I've become a little bit of a recluse in my old age.

Okay, good, good. So, yeah, I mean, ultimately, I think we should move away from the discussion about WeWork versus IWG, because in a way, it's irrelevant and both can be, I know relatively little about WeWork at this stage. I haven't, I follow it vaguely. I think what I'm most excited about with IWG is this whole move to the master franchise model and a capitalized model, which I believe you wrote about, of course, you did. all this work there as well. Yeah, can we put a pin in that? Because I do want to come to that in a second. That's a huge piece of story. But I just want to dive in a little bit to some of the things you just mentioned there. First, you mentioned I live a nomadic lifestyle. I love having that, I love having that flexibility across the globe. And that's an interesting one, right? When I first started researching these, I thought that was big. You know, I do, especially pre-pendemic, we would do lots of trips to the Northeast, right? So go out to Boston for a day to meet investors

and all that sort of stuff. And I love that with my WeWork membership or Regis membership would be the same, right? I could just use it and go rent a desk, go get a desk for free out there for a day or all that sort of stuff. But I was, you know, I had a basic fit on here. And they talk about franchising the market. And one of the things that kind of struck me was I was like, oh, that makes sense, have a gym close to your work and your office and when you travel.

And a lot of people said, look, for 10% of the population that matters, but for 90% of the population, you know, they just want the gym by their house and they're just going to use that and they're never going to use kind of that big network or you know my mom subscribes to planet fitness and yeah you get access to every planet fitness in the globe but guess what she doesn't go more than five miles from the house so all she cares it so i do wonder like it does having that scale matter because i do think like i remember vornado they said hey if we thought that we work economics really work like we own 10% of the office space in new york city we could start a new york City, we work pretty quickly, but Vernado would run into that scale issue that we work and

Regis have global, whereas Verna only is New York City. So do you think like kind of having the global network really matters? It matters for large corporate customers, not for all large corporations, but for large corporations and you obviously want chunky new clients. And for them it matters very much. And then there's a pricing issue. And I'm a price sensitive customer, but I also need high-end office space on occasions. So sometimes I need a relatively cheap meeting room and sometimes I need a very high-end meeting room. And I love about IWG that I can have very high-end meeting rooms in London Mayfair in hedge fund country basically, you know, where I'm somewhere between the family offices of billionaires and luxury hotels. And just as much I can go to East

London if I meet with tech people and I can be in some, you know, slightly, I don't want to say grungy, that's not the right word, but it's slightly edgy a neighborhood. and pay less for the space. So I think there is an important distinction here with price as well and having different brands. And IWG has a whole range of different brands. It's Regis Spaces, Clubhouse is the higher end version and a whole number of others that I can't remember off the top of my head now. We're going to come back to brands a second, but I just one more question on the enterprise value

because I agree with you, right? I think enterprise, you know, the hub and spoke system is what a lot of people are saying, right? The enterprises will have big offices that they probably own in the big cities, but then for suburbs or their, you know, employees who want to work for one day a week from home or close an office in the suburbs or something like having lots of coverage as Eregas makes sense. But I guess the pushback would be giant corporations, J.P. Morgan, Walmart, all these guys. Yeah, they subscribe. I know they've got Regis memberships, but they manage without flex office space like this for, what, 50 years, 100 years, 2.0. hundred years for J.P. Morgan Chase, like, do they really, it makes sense theoretically to you and me when we say, hey, this big flex space works for giant corporations. But is there really proof of that? You know, they've managed for a long time without that. Well, IWG has been signing up a bunch of these clients recently. And if you are looking at growing this to about,

you know, a quarter of the office market, it means that there will always be the J.P. Morgans and Goldman Saches that prefer to have their own office. It's not like they're going to take away everything. It's just that from the current market share 5%, it's going to go up a lot because there are now just simply a lot more companies and office users who prefer a flexible solution. Perfect. I want to talk brands and then we'll move to the franchising model because the franchising model is new.

It's really exciting. But I do want to just dive into the basics a little bit. So for those who are familiar with IWG, their largest brand is Regis, but they've also got a lot of other brands. They've got spaces, they've got HQ, the wing clubhouse. And their argument would be, look, we can use all these brands, as Sven was saying, to hit every price point, right? If you want something in the swankiest neighborhood of downtown London, that's probably, I think it's clubhouse or spaces would be where you want. Whereas if you want something that's more in a workmanlike warehouse suburb or something, maybe the regis works for you or something.

So they can hit all brands versus when you think we work, we work is one model. across the globe, they have, WeWork is their brand. And you can see arguments and differences for both. I think WeWork would say, hey, most people don't even know, Regis is the best known brand for IWG, and I doubt many people know Regis, and nobody knows any of the other brands where at this point, everyone knows WeWork. And again, that's capturing a lot of mind chair. And if you think about going and pitching to a CEO, hey, we want to get some flex office space.

The first thing that's going to pop into their mind is we. So I just want to talk about why does IWG's model of all these price points make more sense than WeWorks model? Oops, Sven, you might have frozen over there. All right, I'm going to pause this for one second and we'll come back if we get Sven back. All right, we got Sven back. We're going to try and do this again. So I was just asking for all the different brands that IWG has, why does that make more sense than WeWorks one brand? It's simply a sign of differentiation for them.

They have, over time, acquired a whole bunch of existing companies across the globe and bought into existing franchises as well. M&A was very much a part of the genesis of IWG, especially throughout these crises moment, one of which we've experienced recently. There have always been opportunities to buy smaller operators for relatively low valuations. and IWG is a publicly listed company with a very experienced team that knows we have to keep financial reserves for these recessions and crises as they occur every couple of years. They've been able to gobble up existing providers of that in that space.

And if you buy something that's successful in its home market, why lose the brand or why try to change the brand? You just keep running with that. And then eventually you end up with a collection of brands, which some may seem as a disadvantage. But for example, I work in the finance industry and I sense, especially in London, you wouldn't invite people generally to a we work because we work sounds of, it sounds like 22-year-old kids at the, at the cider, you know, cider tap, basically. These brands work in different ways and I don't think there is yet that brand that

will capture it all. I don't think rework is out to dominate the globe quite in the way. that its founder once set out to do it. It's a very, very large market. I mean, office space is one the largest markets in the world. And, you know, I think there's no either or discussion and multiple brands, even for I WG in London, which is where I'm a heavy user, you know, I use it all across London and I use it for different purposes, different companies and different, hence I use the different brands. I think that model works very well from my observation. It's not going to win over everyone, but no company will. Perfect. So let's turn to, I think, the coolest part of the story,

the most exciting part going forward. You know, if you and I were talking five years ago, I don't think IWG had any, or they had very limited franchise and partnered managed locations. As of the end of 2020, they were up to, I think, 28% were partnered a franchise. End of 2021, they're 35% and they say they're going to be 50% by the end of 2022. And this is going to play into, when we talk in a second, they've got big growth targets as well. But I want to talk about what they're doing with the franchise and managed model, why it's so exciting in all of that. So first of all, let's talk about what does it exactly mean to have a franchise partner?

That basically means that in any given country, IWG says we have a local partner who's responsible for sourcing properties operating them, but they do it under the IWG brand. They tap into the global distribution and marketing network of IWG. They get the entire setup that the head office provides. And in exchange for that, they have to pay franchise fees. I mean, that's the normal model on which McDonald's operates and Hilton hotels. And it's exciting for the company for one particular reason. Actually, there's really two reasons.

First of all, it allows IWG to move to a more capital light model. Instead of having to do all the heavy lifting themselves by when they go into markets or grow in these regional markets, they can leave the heavy lifting to a local franchise partner who come up with the capital and to have the local expertise and make sure that they find more of the space. And IWG simply gets franchise fees for that. And franchise fees are by definition of very high margin income if you can convince anyone to purchase a franchise of you.

Because obviously, you need to provide a lot of value to a franchisee. And unless you have a lot to offer, no one will want to buy. franchise of you. So IWG having taken this to about, you know, as you said, 28% of its revenue, it means that there's already proof of concept. There is demand for IWG franchises. And now the most exciting thing comes into play. If you have an existing network of offices in a country and you want to partner up with a local franchisee, the local franchisee might say, I buy all the existing operations off you. And for that, I purchase a, I pay a one-off price to you.

I purchased the master franchise for that country, but it means I have to pay a lot of money to buy the existing business. And this is where IWG has struck some incredibly good deals in the last couple of years, in particular in Japan, in Switzerland, in Taiwan, a very small one in Monaco and Gibraltar. And these deals indicated that by selling its master franchises in a number of countries, IWG can generate a lot of additional one-of income. It's really only one-off, but they're not selling the entire business. They're just selling the master franchise.

So they're getting a one-off amount of money in. And after that, they get annual franchise fees, which come with a very high margin. And that will completely change the nature of IWG. It will move similar to what Hilton Hotel, for example, has done. I think Intercontinental Hotel has done something like that, Marriott Hotel. they've all moved to more franchise-based models. And you've done some work on that as well. You will probably second me when I say that the amounts that could be paid for master

franchises in key countries like the United States and the United Kingdom could be absolutely insane compared to the current stock price. Yeah, look, this is one of the reasons I originally got involved. You mentioned the Japan deal one, and that's like kind of when I was looking at it. That's what I got excited about, right? I think they said they sold Japan. I'm kind of doing it for memory, but they sold Japan for like around 15 times, LTM maybe it was 13, 15 times, but you know, you look at the stock and you've got to normalize

for the pandemic. We'll talk about that in the second, but the stock probably trades for eight or 10. So you're like, hey, if they sold the whole, all the everything the company owned, right, they'd get a 3x multiple plus they'd have all these ongoing franchise management, whatever royalty streams, which the market always puts a huge value on those. The last thing I loved was, as you mentioned, you get these local partners who are incentivized to grow the business, right? They're going to invest their own CAPX. And you kind of get scaling compounding effects where the local partner buys it, makes a ton of investments to grow the

business. And your franchise fee is just going ticking up and up and up because they're growing it for you. And yeah, that's what I, that's what I loved about that. Yeah. And then once you look at the figures for the UK and the U.S. market, it gets very exciting. So there's a lot of discussion among the analysts that follow IWG, just how you value these master franchises. And there's no formula that fits all. Japan probably received an extraordinarily high price. And I wouldn't extrapolate that across the portfolio. And you didn't either from what I remember.

So I'd be more cautious in my assumptions. But if you apply some reasonable assumptions what the UK and US franchises would be worth, it basically boils down to IWG could get a one-off purchase price that exceeds the current market cap and on top of that continue to receive franchise fees. And just to put this in perspective, the US and the UK makes up 40% of IWG's revenue. So once you look at it from that perspective, you'd really have to say, well, this business could be worth two or three times what it's currently trading at on the stock exchange. And these are all order of magnitude valuations, but that's pretty much what it boils down to.

And in a best case scenario, we could see a sale of the US and UK master franchise and a special dividend that even exceeds the current stock price, which is insane. And we probably shouldn't even speak about it in public because no one is going to believe us. But such is the undervaluation of that company right now. It just needs to be unlocked. Yeah, no, that makes a little sense. And I would, one thing I'll just quickly, I'd look, if you look at the financial statements at a glance, IFRS has caused them to bring all the operating leases on the business. So you might look at it and say, well, Sven just said they'll sell the business for more than the market cap, but it, this is so levered like everything has to go to pay down debt. That is not true. This is not a super levered business. It's all operating leases. I think, you know, 400 million of debt or so net debt on a three billion market cap. So if they sell this for more than the market cap, that cash, hopefully it's, it's coming home. to daddy, you know, so I don't think that's an issue just to jump, jump in front of that. Speaking of, okay, let's talk a little bit about, so the pandemic obviously affected them.

You know, EBDA went way down from 2019 to 2020 to 2021. And now we're on the crux, I think, of growth, hopefully, you know, either the growth could come from a M&A forum where they sell the U.S. and U.K. operations and just get a lot, but there's also a lot of growth from pricing, you know, from offices. filling back up. So I just want to talk about what does the recovery from COVID look like and kind of the go forward growth plans? It's messy. That's, I think, the only way to put it. So it's very hard to give a summary of how exactly that recovery is going right now, because there's a lot of back and forth. I mean, you remember that towards, I think it was last autumn, the world was

opening up again and then Omicron happened and then countries reacted very differently to that. And there was also a lot of regional variation. So if I had to give a one sentence summary of how the recovery is going exactly, I'd say it's kind of all over the place. And I think this is one of the reasons why the market and why the stock has recently taken a bit of a dip again because there's no clear direction here right now. And what we really need is a stable period of six to nine months where we can see how is the company performing when they're not these constant disruptions. And to me, it feels like we're getting there right now, not everywhere yet. So I'm obviously in the UK and here things have gone to completely normal again for the

time being. But I traveled to Hamburg, Germany last weekend, where they are under such a strict COVID regime that I thought I had just gone in a time capsule back to, you know, April 2020. It was insane. And the bottom line to me seems to be this. So, So this company has gone through the crisis relatively unharmed compared to previous crises. There's never been a moment where IWG was at an existential risk. Quite the opposite. The company at one point raised another £300 million in equity, sort of coming close to $500 million. A third of which was provided by the major shareholder.

He subscribed to additional shares for £100 million. So the company has firepower. they've obviously used this relatively quiet period of the pandemic when everyone had a lot of time to come up with new growth plans and to initiate some growth plans, one of which I quite like, and I'm looking forward to seeing how that works out. They have created a first partnership with a hotel chain to see if IWG could operate flexible office-based setups in hotel lobbies. So this would be an entirely new market. And when you speak of the growth potential in the years going forward. Their whole number of new strands that weren't there before, and we're going to see

in the next 12 to 18 months how they're working out. So I think there's going to be a lot of news about what exactly is the potential for the company going forward. It has this plan to grow from 3,300 centers to 20,000 by the end of the decade. And we're also going to see normalized financials. And then from there onwards, we'll have a much clearer path. And that's really what we need for this stock to recover. We need a clearer path. which up to now, we haven't had that so far because of the constant back and forth. Let's talk about management. So you mentioned one of the things, again, in April 2020, I was like, IWG is my recovery play.

I love the non-recourse leases, strong balance sheet. I think hybrid is going to be a huge play going forward, all this sort of stuff. And one of the things that turned me off on them was in May 2020, they did, as you said, a 300 million pound equity raise, which was, you know, I think if I'm recalling correctly, it was like 15% of the equity capital or something. And management participated in it. They bought a lot of it. But at the same time, I was like, look, you guys are raising equity kind of at the bottom here to go play offense.

And then I also got a little upset. Like, I don't, you know, when you raise $350 million of equity, you expect offense to be really aggressive. And I didn't see a lot of aggression, right? I kind of thought they were going to buy we work in distress or something. or they were going to buy it. And they didn't really do a lot of offense, if I remember correctly. So I kind of looked at and said, is this a management team that's willing to go be aggressive, or are they too scared? So I want to talk equity raise, how you look at the management team, all that sort of stuff.

Oops. Sven, I think I lost you again. So I'm going to go ahead and press pause. All right, we lost Sven for a second. He promised me he's got a fast internet connection. I think I've got a fast internet connection. But Sven, I was just asking you, you know, the equity raise at the bottom. I don't feel like they played super aggressively. And we can talk capital allocation. You know, IWG almost sold itself twice in 2018 and 2019. And those deals ended up falling through.

We'll probably come back to that. But when I look at this team, I'm like, I don't know if they're really here to really maximize shareholder value or if Mark Dixon's just kind of, he owns 30%. And yeah, he wants to grow up. But, you know, I don't know. So I just want to turn all that over to you. Well, you have a founder who built this from. scratch. And, you know, by way of him living in Monaco, you will know that he's a hard-nosed capitalist.

He set up this company in a way that optimises everything in such a way that you could be seen as a bit of a baddie. I mean, he has his head office in Switzerland. He's located the company in Jersey, which is another tax haven. And of course, he's trying to play this to his best advantage. I believe he's 61 now. So he might be approaching an age where he's also thinking of cashing out. Just in the last couple of weeks, we've seen insider purchases from the company. The company has been buying back stock. It already purchased back a lot of stock. I think it owns about 5% of its share capital as treasury stock. So here's a guy who really knows how to optimize things for himself. There's absolutely no doubt about that. And you'd want

to latch onto him, but in the right way. So obviously, we're looking at this company right now when the stock is pretty much down in the basement. And I think this is the time when you really need to buy it. I don't think he's done anything untoward or anything overly aggressive. But like every good entrepreneur and investor, he's maximizing opportunities to his advantage. So, you know, the motto has to be latched on to him. One thing that is important to keep in mind, there is a hedge fund company in London, Tosca Fund, who owns 17% of the business as well.

So, and these are activist investors and they're quite aggressive. So if IWG ever did anything that was really pushing the envelope too far, he'd have a 70% shareholder pushing back. And I don't think he will want to get himself into that situation. Yeah, no, look, I agree with you. My general take on him has been positive. You know, again, I loved how during 2016 and 2017, when everyone was just loving on WeWork, he was saying, look, these are all the mistakes we made. We'll tell you right now exactly what they're doing.

And it wasn't just that they were signing recourse leases, that that was a big one. He was also like, look, in this business, to make money, you need to sell ancillary services. You know, I think he was saying at the time, 20 or 25% of our revenue comes from ancillary services, renting conference rooms, printing, selling drinks and snacks in the lobbies and stuff. And he's like, WeWorks not doing that. I think they're in celery services was 2% of the time. It's like, you cannot make money at those levels. So I think it was very prescient, but at the same time that equity raised dinged me, you know, how. the private equity sales falling through kind of, I was a little bit concerned about that,

but I think all of that is right. Let's talk growth plans, right? So this is a company right now, 3,000 locations. They want to franchise and partner on a lot of them, but they have some pretty aggressive growth plans. And we work mirrors them, right? They say, hey, the future is hybrid. We've already discussed how large companies grow in hybrid, but IWG wants to go from 3K to 20,000 locations. And I do think there would be a fair pushback that says, hey, you guys for the past 20 years, have been investing your own capital, brick by brick to grow locations. And now all the sudden, you want to flip a switch and go capital light franchise and go from 3K to 20K over the next 10 years. Like, why is now the time? What has changed? Or are you kind of like on

your heels from COVID and just pitching a different song to get people interested? Yeah. Interesting enough, they even once communicated that they wanted to go to 30,000. So going to 20,000 means they've already cut back growth fans a little bit. I could be misremembering a digit. So if it's 30K instead of 20K, I'm sure they cut it back to 20K. And I guess they just got too much pushback, really. Yeah, of course. So I think there's two elements to this, really.

First of all, we are now at a unique moment in time. The moment when flexible offers providers are having their moment of glory has really come because this whole flexible office concept has taken the imagination of the wider public. Everyone understands that the future is all about hybrid work and hub and spoke models, et cetera, et cetera. And I think the growth in the future is going to look slightly different than what they did in the past. It's not going to be just so. Oops, I think we lost you again. Yeah.

All right. I'm so sorry for the technical difficulties. We've got, Svenna just said, the future is, hybrid, and I'll just let them keep going. Yes, so there's this unique moment in time now when suddenly everyone has understood that the future is to a certain extent about flexible office-based solutions, hybrid work and hub-and-spoke models.

So will they be able to scale up dramatically compared to where they are today? I have absolutely no doubt about that. Will it take them to 20,000 by the end of 2030? Possibly, it certainly looks like a bit of a stretch, but you could also have new factors entering the equation, such as partnerships with hotels, which is what we spoke about earlier, putting flexible office-based solutions into hotels. So if you team up with a Hilton or Marriott or, you know, you name it, and you get a thousand hotels suddenly, that gives you a pretty strong boost in your growth plans. And we might be seeing stuff like that, and that could actually take you, you know, towards 10, 12,000 in the foreseeable future. you have to double it again. It's feasible. I love the fact that they're ambitious. I think

that's exactly what a CEO and a company should be doing. 2030 is a long time away, and I don't have a crystal ball either. So it seems a stretch, but let's be ambitious rather than lacking in ambition. I think that's also quite important. I like that motto. So let me talk about one last thing on the heels of this, right? So, one of the things that originally, originally attracting me to IWG was that franchise to, that owned to franchise model that we've already discussed. But another thing that has gotten it back on my radar, other than your write-up, of course, is they just bought into, they've invested a lot into tech, right? When you've got a franchise model, you need to have reasons for people to buy into the franchise.

And a lot of times, that's the brand, right? A McDonald's brand is going to sell more hamburgers then what's the what is the uh coming to america thing the macdowls brand or whatever McDonald's is going to sell more hamburgers than your average franchise brand so people pay up for that they want the marketing they want the back office support and iwg offers all that right they've got tech they've got back office and they've got that global network that people want to buy into because a flex space with a global network is probably going to have more value than a flex space that has one office so all that makes sense but they have invested a lot into tech and they just did an acquisition and they said hey we're merging this acquisition into

our other acquisition. It's going to have all of our digital back office tech type things, and we're looking to spin this out in the next two to three years. So it got back on my radar because, like, oh, not only is this an owned to franchise model, we're also looking at a potential corporate action, a spinoff. And, you know, anybody who's followed this podcast or knows some bed investing knows spinoffs are great. But I do worry about this acquisition because, you know, they made the acquisition. I think they invested 270 million pounds all into this acquisition. And when someone asked them, they said, where's that money going? Is it to investing and growing this company or is it to prior shareholders? They said, oh, most of that's

going to buy out prior shareholders. And if you followed buying companies, when you buy a growth company and all the money goes to buying out former shareholders, it generally does not work well for the company that's buying it, for the buyer, right? It's generally prior shareholders leaving you with a bag. So I wanted to talk about both the spinoff plans and how you view that acquisition. Yeah. So, the. acquisition is of a company that offers, it's more like an Airbnb for office space. You can go in there and rent a meeting room for an hour a day, and this is something that they want to roll out globally and then have it, as you said, as a standalone company and take

it to the public market. I believe by the end of 2023, which again is quite an aggressive growth plan, the management is majorly invested in the company as well, so much as you had some shareholders. Just to clarify, this is the management of the company. bought is majorly invested, as well as obviously the IWG management, but this is the company that they bought has big insider ownership. Yeah, yeah, yeah. And when the management of a company that gets acquired, when they put serious money of their own into it, that gives me a lot of confidence that they want to something, would I see

that, would I say that the first idea that you'd have for an acquired company to do a spin-off and an IPO within 24 months is that the first thing that comes to mind. I think, yet again, they're being quite ambitious here, potentially a little bit aggressive. Will they achieve the valuations that they are currently hoping for? Looking at how tech companies are currently getting absolutely slaughtered and how valuations have come down because of rising interest rates. It does seem a bit like a stretch right now. But again, I also look at this not just as an investor, but also as an entrepreneur.

I think you have to set these really ambitious targets to get anywhere. And I mean, you know, with, I have this slight pettate with Europeans in particular, often lacking in ambition. And Europe doesn't quite have the aggressive growth companies to the same extent that you've got them in the United States. I viewed as a good thing that they're putting out these messages. Given where the stock is currently trading, you know, the stock's not really pricing in any growth right now. The stock is almost priced for, you know, IWG going down the toilet. So, you know, it doesn't take much in terms of a cheap. growth for IWG having to get a revaluation. And I think that's what we're going to see in the next

six to 12 months. And this acquisition can be a part of it. I see it more as an add-on rather than really as too major a part of the equity story. Not just yet. They need to build some traction. They need to build credibility. And then fast forward to next year spring. I think then we can see if this should really be added to the valuation and to the future growth prospects. I'd say for now, let's focus on the core business as it is, how it will perform in the recovery. how it will take advantage of these existing growth opportunities with its conventional model, and also see what comes out of the discussions of master franchise sales this year, which is something they've now restarted during the pandemic.

They couldn't negotiate for that because of you couldn't travel, you could meet. Now these negotiations have been started again, and we might see some action on the side of selling master franchises. I think that's the more immediate exciting part of this. Leave this acquisition aside for now. It's not something I would put too much emphasis on for now. So you mentioned the stock is in the toilet. And I just want to ask, you know, the stock price before COVID was 450 to 500. I guess that's pounds per share or whatever, right?

Ten. Pence, sorry. Today the stock is about 260, right? So it's been about cut in half. And obviously, COVID has a lot to do with that, right? It takes a long recovery. But at the same time, when I love it. look at like an SLGR Verna, which own New York City office space, right? Their stocks are about

a third down from the pre-COVID peaks. And, you know, that's New York City only office space, not worldwide flex office space. So I would say, it just, it strikes me as a little surprising that IWG would be down much further than them. And then I'd add on to that, you know, IWG paints the bullish picture on the future. They may or may not have that spin-off. And They're buying back shares at a pretty decently aggressive clip right now. So when I roll all of those together, my overarching question to you would be, what is the market seeing that we are not? Or what are we seen where we're so bullish on this that the market is not? Oops, looks like I lost you again.

I'm going to pause. All right, we're back. I don't know how we're going to edit this one. So I'm sorry to our listeners. We're having a little technical difficulties to Spend. But, Sven, I guess we'll make this the last question since we're having so many technical purposes. You know, I look at IWG and I see a stock price that's 50% below where it was pre-COVID.

That's much worse than, you know, like people who own New York City real estate or something. And I would say they should probably be impacted less. They've got this growth story. They've got the franchising agreements coming on. They're buying back shares at a decent clip right now. So I just look at it all and I say, what is the market seeing that we're missing? Or conversely, what are we seeing bullish that the market is missing? Well, there are really two answers to this. First of all, with regards to the stock going down so much,

keep in mind that this is still a stock that very few people actually have on the radar screen. There are not many flexible office-based providers listed on the stock market. The entire sector has had a really bad reputation because of what happened to rework. So there was a lot of doubt there. Those people who know the business will remember the near bankruptcy of the early 2000s. So when COVID and the lockdowns happened, that did play a role in people's minds. And it's not widely followed, really, as a stock. So I'm not that surprised that it dropped down so much.

I'm somewhat amazed that it hasn't recovered more because of what I feel is the amazing free optionality of this company. So I'm very much, on one hand, looking at undervalued companies. My website is called undervalued shares for reason. But for a company to become less undervalued, for the stock to, to gain in value, you need to have some kind of catalyst, you need to have some kind of trigger. And that's what I'm always looking for. And I'm super excited by the fact that they have openly spoken about wanting to sell major master franchises. And the very obvious ones to sell

are the UK in the US. And not selling those, we get the more cash than the entire market cap, or around the current market cap. And this being a company that is structured, the way it's structured, then see a special dividend that is a tax-free capital return for shareholders. And you could receive your entire investment back, but retain a stake in the business. And it's a growing business and it'll be a higher margin then because of the franchise fees. So I call it an investment that can have potentially longer term an infinite return in the sense that once you've received your capital back, you own the shares for free and then anything that comes in is just the cream on top and mathematically gives you an almost infinite return on your invested capital.

I think we're going to see such an event probably in the next, well, hopefully, or probably in the next 12 to 24 months, a master franchise deal will be struck. And then you'll see a complete revaluation of this company, potentially overnight. And we could also yet see a bit for the company. We did have bid interest recently. As I said, the owner is 61 now. He already lives in a sunny place. I wouldn't rule out the possibility of someone taking over the company.

I would put that at 10 or 20% right now, but that's high enough for me to play into my whole investment equation. And the one thing that I'm most excited about is the free optionality given by the sale of a master franchise. Yeah, look, we'll probably wrap it up here just because of the technical difficulties, but I'm with you, there's been three P, three credible P bids for this in the last four years. And I think it makes all the sense of the world, right? A, as you're saying, everything that we've talked about is what private equity should be interested in, right?

You can sell this off to the franchisees and get a lot of your money back. You're going to have this great franchise network where I think there is a really credible argument. So you made, hey, the largest flex office player, which IWG is, should have big advantages because they've got that big network effect. They should get scale on branding. They should get scale in marketing. It should be really attractive for franchise players. So I just, I think it would make all the sense of the world for private equity to come in. And anything that it makes all the sense of the world for private equity come in,

it probably makes sense for an individual investor to at least look at before they come in, because there's a reason they would come in. So I think we'll just wrap it up here again. I'm so sorry for the technical difficulties. I'm going to try to edit some of this out, but I'm a one-man shop. It's going to be tough. So I'm sorry to our listeners. But, Sven, anything else you want to say before we wrap it up here?

Well, first of all, I mean, everyone's invited to take a look at my website. I have a free weekly column in there. I'll include a link in the show notes. Again, it's very reasonably priced. And I found the ideas are generally right up my alley. So, you know, I'm G, Twitter, Burford, John Menzies, I mentioned four of them already. So Twitter was published 30 minutes before we started recording. So Sven's out here working hard.

He's prepping for a podcast and publishing on Twitter. Yeah, yeah. And besides that, also absolutely love your work. So I love following you. And it's great to see someone who's got similar ideas and goes about them in a very similar way. So, you know, I'll be, I'll be intently and keenly following your writing as well. Hey, well, I really appreciate that. And we'll have to have you back on since you've got so similar.

We have to have you back on when we lock you down to an Ethernet cord and you've got the phone, the telecom company giving you priority internet access next time. Well, here's the here's a deal and a suggestion. I'll go to a IWG meeting room somewhere in London and we'll do it from there. I like that. I like that. Sven Larsen, thank you so much for coming on. Have a good one.