How Regus can stay ahead of the game by ducking flotation

Flotation is an attractive proposition for Dixon and his colleagues, but private ownership could be more fruitful long term, says George Pitcher

Until this week, all I knew about a company called Regus was gleaned from the bottom of jump-seats in taxis. It is a serviced-office provider and judging from some of the pictures in its ads, I fantasised not just about moving my business to a hassle-free Regus environment, but also going to live in one. I’ve stayed in worse hotels.

Regus trades on the very real desire of business people to have someone else manage their overheads. One of the most frustrating factors of developing a business is being too busy with the photocopier engineer to do so. You can be far too busy running the business to make any money. Regus takes that frustration away – it will even provide the support staff, so you can be reasonably sure that you don’t have a psychotic on reception and, if you do, it is someone else’s job to call the men in white coats and replace them.

So Regus is one of those rare businesses – a service-provider that provides something tangible, a measurable benefit to the running of businesses. But this week it is better known for not doing something. What it is not doing is going for a stock market flotation this year, for which a pathfinder prospectus was expected to be published this week. It would have raised equity capital of the order of £250m and capitalised the whole company at about £1bn.

The young Mark Dixon, who founded Regus with the £800,000 proceeds of the sale of a bakery, stood to have his stake in the business valued at about £800m, so it is not surprising that he has described the cancellation of the float as the hardest decision of his business life. The opportunity worth £800m is not one to turn down lightly.

The official explanation is that no acceptable consensus could be reached on how to value the company, there being no comparable business anywhere in the world and Regus sat uneasily in the business support category of the FTSE Actuaries All-Share Index. So be it – the FTSE classifications have been notoriously slow and unimaginative about sector classifications, failing to exploit the recent fashion for index-tracker funds and driving new-age businesses abroad to capital markets such as Germany’s Neuer Markt.

But there are unkinder interpretations of Regus’s sudden volte-face on the London Stock Exchange. One of the more cynical views is that problems with valuation methodology are invariably little more than euphemisms for the company being valued too expensively.

I don’t think that this is to do with Mr Dixon’s greed. I’ve never met him, but I read in a publication that he is so alert to signs of fat-cattery that he lives modestly. In any event, one can hardly accuse him of an unwillingness to potter along on a little less than £800m when he’s just taken the decision to throw away his chance to cash in, at least for the time being.

The valuation problem doesn’t lie with the founder. The argument goes that Regus wanted to be valued at a shade under ten times its sales last year of £112m, without putting up a convincing enough case for where future earnings are coming from. Meanwhile, Regus makes losses and has a board (over which, presumably, Dixon exerts some influence) that articulates a strategy of expansion that rules out profits (and therefore dividends) before 2002.

The resonance here with the Internet sector is penetrating. It’s only just the other side of the holiday season that anything faintly “dot com”, that wasn’t making any profits and had the track record of a mayfly was attracting stock market valuations that put them on a par with small countries. August’s correction on Wall Street in this sector has done little to dampen the ardour of the market’s reception to other Internet stocks coming to market in the UK (though shares in Freeserve and Exchange Holdings have not performed well since flotation).

Such, perhaps, is the nature of the stock market’s fickle fashions. The Internet is perceived as the medium of the new millennium, which will return investors’ confidence in spades. Serviced-office space is, by contrast, an established activity that has its roots in the increasingly discredited idea that people will actually require offices once the Internet has made it unnecessary to leave wherever we choose to make home.

There is a greater significance to the Regus withdrawal from the flotation game. Regus is committed to a strategy of international expansion of its services. That is why it proposed to raise further capital through a public listing. But, in the same way that Regus will be aware of the hassle that it relieves its clients of having to manage, it will be sensitive to the hassle of satisfying demanding institutional investors and the reporting requirements of a public market.

Then you look at what is called the new paradigm of the global economy – low interest rates and low inflation. Loan capital begins to look just as, if not more, attractive than equity capital. At a time when Internet entrepreneurs are cashing in through flotation, Dixon and his colleagues may be pointing to a better way of developing a business long term through private ownership.

If he is doing so while resisting a quick fortune of close to £1bn, he deserves our admiration rather than censure.

George Pitcher is a partner of issue management consultancy Luther Pendragon

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