Swen Lorenz from Undervalued-Shares on $IWG (Podcast #100!)
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. You can find my notes on IWG here.
Note: we had some serious connectivity issues on Swen’s side. I did the best I could with editing, but I’m a one man shop and not a great editor. It was either release as is or drop the podcast, and I would hate to do the later because it’s a good discussion / idea!
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Transcript begins below
Andrew Walker: Hello and welcome to Yet Another Value podcast. I'm your host, Andrew Walker and with me today I'm excited to Swen Lorenz. Swen is the founder of undervalued-shares.com. Swen, how's it going?
Swen Lorenz: Good. Hi, Andrew. Very good to be with you. Looking forward to our chat now.
Andrew: Hey, I'm looking forward to it to 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 a pitch for you my guess, I've been a subscriber to undervalued shares, I'm gonna say for nine months and I've been loving it. You and I traffic in the same situations it seems. John Menzies, which we were talking about before the podcast. I don't think I'd mentioned it anywhere else. But you did great work on that. And that had a little mini bidding war, which is awesome. But recent write-ups, Burford right up my alley, previous podcasts on that, Twitter right up my alley. And the stuff we're going to talk about today, IWG. So, 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, they're best-- well, I won't even say what their best number is. I'll just turn it over to you. What is IWG and why are we so interested in them?
Swen: IWG is a company that many of you might know by the name of Regus. It was listed as Regus for about 16 years until it changed its name. It's a flexible office space provided 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 three and a half thousand. The company has offices in 1100 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, our desks, our entire office solutions, you can go there for your 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, it's head offices in Switzerland, its CEO lives in Monaco. And it's got some exciting growth plans, which you wrote about as well. So I think some of your followers will be familiar with it already.
Andrew: Yeah, look, this was right at the kind of the April, March 2020 timeframe. This is was actually one of my favorite ideas. I just thought we'll talk about all the reasons, but I thought this stock was gonna be a killer. And it's funny, I've only been following it loosely since then. But it probably hasn't performed quite as well as I would have hoped. The only other thing I'll mention is that you mentioned that we were comparing, which I think is going to come up a lot during this podcast. But it is interesting. You're back in 2016, 2017. 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 we work 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 we were just doing right now is exactly what we did during 1998, 1997. It ended in tears 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 brute been proven more correctly. So let's dive in. I guess there are 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 in where do you want to start it?
Swen: So I mean, since we 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, WeWork 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 in the market hasn't quite fully understood yet. So during the pandemic during the famous March 2020 crash and subsequent lockdowns, obviously, the company was also suffering because tenants couldn't get into the office centers 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 reaches almost went bankrupt? And the clear answer is no. Because the company has very strong finances. It's got based on normalized years. It's got an EBITDA to debt ratio of less than zero, it's got 800 million pounds in the bank in cash. It's not very highly leveraged. And it's basically ringfenced against bad situations such as the one that we've lived through recently, which is why it's so different than WeWork. There's an owner who's been through it all already. And he wants to use a crisis like this as an opportunity, which has 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 provider providers that are listed on the stock market. It's a much more safe and more reliable growth story for the 2020s. And that's one of the key reasons why I got interested in it.
Andrew: Yeah, let me dive there. I hate to compare so much that WeWork but look, WeWork is the name. Everyone knows, we were the brand and I put this in my notes. WeWork on their earnings call, I was just reading it as I was prepping for this. And they said, "Hey, we think we're the only..." WeWork at this, "We think we're the only people who can kind of meet enterprise, enterprise office people their needs at scale, an IBM or 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 seven to 900 per week. And I was like, Regus, IWG they're profitable. WeWork is way on profit. Like there's so much bigger. So the first question I want to let me expand on that a little bit, actually. I have a flex office space, I always take this podcast from my apartment for people who are familiar with that 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 them for five years. I and the person who I share an office space with always go to WeWork. And I do just wonder if we were right, like that mindshare that they've got, there's the Apple TV, WeWork crashed show or whatever. They've just got so much mindshare. Do they have a sustainable advantage over Regus because of just that mindshare, and I want to dive into the brand a little more in a second, but I'll turn that over to you?
Swen: I think it's a bit like speaking about British Airways and 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 from like WeWork in particularly loves the whole total addressable market. So even just 10 years ago, flexible office space made up about one and a half percent 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 have latched on to the idea of flexible office space and hybrid working has become much more thing.
Large corporations are now switching to what they call a hub and spoke model where they do keep in a headquarters, 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 guesswork, but I don't think 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 WeWork has one of the more mindshare or whether the brand is stronger it's probably like Coca Cola and Pepsi or like McDonald's and Burger King, Hilton Hotel and Marriott, asked three people about this and you get different opinions. Everyone has their favorite brand. Speaking of mindshare and brand recognition, I want to try to get the WeWork membership myself and I wrote in my report that I tried six times, I went to an office center twice, I send them two emails, and I called them twice. And no one there was able to actually sign me up for membership. I mean, it was an absolute shit show in terms of customer experience.
Andrew: I said at the beginning that I'm trying to renew, are WeWork lease right now. And I will tell you, it is just their pricing systems and their billing. It is so insane how ridiculous it is and the customer service. It's really crazy. And there reminds me of dealing with almost a government bureau bureaucracy, how poor some of the staff in the customer services and some of the decisions just don't make any sense. But neither here nor there. Please continue.
Swen: Yeah, so that was actually why I ended up with IWG with Regus and I am an extremely happy customer there for me what makes a difference that I'm I'm alive somewhat nomadic lifestyle. So I really appreciate the fact that I can go to 1100 cities around the world and they will probably be in office space for me, which is something that WeWork 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 company with staff all over the world, not yet now, you will get there. I'm sure.
Andrew: My wife is working from home today. And she heard you say you don't travel as much. And she's laughing at me right now. [crosstalk] A bit of a recluse in my old age.
Swen: Okay, 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 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. I believe you wrote about it, of course, you did all this work there as well.
Andrew: 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 the 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. I do especially pre-pandemic, we would do lots of trips to the northeast. So go out to Boston for a day to meet investors and all that sort of stuff. And I love that my WeWork membership or Regus membership would be the same. I could just use it and go rent a desk, go get a desk for free out there for a day, or that's your stuff. I had a basic fit on here. And they talked 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, 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 "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 I do wonder like, it does having that scale matters. 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 we're not I would run into that scale issue that we work in Regus have global whereas we're not only as New York City." So do you think that kind of having a global network really matters?
Swen: It matters for large corporate customers, not for all large corporations, but for large corporations. And you obviously want to 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. What I love about IWG is that I can have very high-end meeting rooms in London, Mayfair in hedge fund country, basically, 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, slightly I don't want to say grungy, that's not the right word, but it's like slightly edgy enabled and pay less for the space. So I think there is a there's an important distinction here with price as well and having different brands and IWG has a whole range of different brands. It's Regus spaces, clubhouses the higher-end version, and a whole number of others that I can't remember off the top of my head now.
Andrew: We're gonna come back to brands a second but I just have one more question on the enterprise value. Because I agree with you, I think enterprise, the hub and spoke system is what a lot of people are saying right that enterprise will have big offices that they probably own in the big cities, but then for suburbs for their 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 a Regus makes no sense. But I guess the pushback would be giant corporations, JP Morgan, Walmart, all these guys. Yeah, they subscribe. I know they've got really good memberships. But they managed without flex office space like this for, what? 50 years, 100 years. 200 years for JPMorgan Chase. Do they really... Like 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? They've managed for a long time without that.
Swen: Well, IWG has been signing up a bunch of these clients recently. And if you are looking at growing this to about a quarter of the office market insert, there will always be JP Morgan said Goldman Sachs 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 of 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.
Andrew: Perfect. I want to talk about brands and then we'll move to the franchise model because the franchise 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 Regus 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 Ben was saying." To hit every price point, right? If you want something in the swankiest neighborhood of downtown, love it London. That's probably I think it's a clubhouse or spaces that would be where you want. Whereas if you want something that's more in a Workman-like, warehouse suburb or something, maybe the Regus works for you or something. So they can hit all brands. Versus when you think WeWork, WeWork is one model right across the globe they have WeWork as their brand. And you can see arguments and differences between both. I think WeWork says, "Hey, most people don't even know Regus, the best membrane for IWG. And I doubt many people know Regus. And nobody knows any other brands were at this point, everyone knows WeWork." And again, that's capturing a lot of mindshare. 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 have all these price points that make more sense than WeWork's model? Oops, Swen, you might have frozen over there. Alright, I'm going to pause this for one second. And we'll come back, we get Swen's back.
All right, we got Swen back we're going to try and do this again, too. I was just asking for all the different brands that IWG has. Why does that make more sense than WeWork's one brand?
Swen: 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 crisis moments, one of which we've experienced recently, there have always been opportunities to buy smaller operators for relatively low valuations, and IWG as 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 his 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 like a disadvantage, but for example, I work in the finance industry. And I sense especially in London, you wouldn't invite people generally to WeWork because WeWork sounds of it sound like 22-year-old kids at the side of the 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 WeWork is out to dominate the globe quite in the way that its founder set out to do it. It's a very, very large market. I mean, office space is one of the largest markets in the world. And I think there's no either-or discussion and multiple brands, even for IWG in London, which is where I'm a heavy user, 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.
Andrew: Perfect. So let's turn to I think the coolest part of the story, the most exciting part going forward. If you and I were talking five years ago, I don't think IWG had any or they had the very limited franchise and partnered managed model locations, as of the end of 2020. They were up to I think, 28%, from partner to franchise, and in 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 manage model. Why it's so exciting in all of that?
Swen: 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 good 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. Well, actually, there are 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 comes up with the capital and has the local expertise and Make sure that they find more free space. And IWG simply gets franchise fees for that. And franchise fees are by definition, a 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 a franchise of you.
So, IWG has taken this to about, 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 purchased 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, Switzerland, 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 a one-off, but they're not selling the entire business. They're just selling the master franchise, so they're getting a wonderful amount of money, 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 amount 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.
Andrew: Yeah, look, this is one of the reasons I originally got involved. You mentioned Japan that's like kind of what 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 EBITDA, maybe was 13-15 times with. You look at the stock and you've gotten normalized for the pandemic, we'll talk about that in a second. But this stock probably trades for 8 or 10. So you're like if they sold the whole, all the everything that company-owned, they'd get a 3x multiple pluses, they'd have all these ongoing franchise management, whatever royalty streams, which the market always puts a huge value on those. And the last thing I loved was, as you mentioned, you get these local partners who are incentivized to grow the business, right, they're gonna invest their own CAPEX, and you kind of get scaling compounding effects where the local partner buys, it makes a ton of investments to grow the business, your franchise fees just going ticking up and 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.
Swen: And then once you look at the figures for the UK, in the US 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, I wouldn't extrapolate that across the portfolio. And you didn't die that 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 UK make 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 the best-case scenario, we could see a sale of the US and UK master franchise and especially 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's gonna believe us. But such is the undervaluation of that company right now. It just needs to be unlocked.
Andrew: Yeah, no, that makes total sense. And I would one thing I'll just quickly add, 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, it's fine just said they'll sell the business for more than the market cap, but 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 400 million of debt or so net debt on a 3 billion market cap, so if they sell this for more than the market cap that cash, hopefully, it's coming home to Daddy. So I don't think that's an issue just to jump in front of that. Let's talk a little bit about...
So the pandemic obviously affected them. EBITDA went way down from 2019, 2020 to 2021. And now we're on the crux, I think of growth, hopefully, either the growth could come in from an M&A forum where they sell the US and UK operations and just get along. But there's also a lot of growth from pricing, from offices going back up. So I just want to talk about what is the recovery from COVID looks like and what kind of go-for-growth plans?
Swen: 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 was last autumn, the world was opening up again, and then Omicron happened. And then countries react 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'd really need is a stable period of six to nine months, where we can see how's 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 obviously in the UK and 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 into a time capsule back to April 2020. It was insane. And the bottom line to me seems to be this.
So this company has gone through the crisis, relatively unharmed, compared to the previous crisis, there's never been a moment where IWG was at existential risk. Quite the opposite the company at one point raised another 300 million pounds in equity, sort of coming close to $500 million, a third of which was provided by the major shareholder, who subscribed to additional shares of 400 million pounds. 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 me, I initiate some growth plans, one of which I quite like, and I'm looking forward to seeing how that works out. They have created the first partnership with a hotel chain, to see if either IWG could operate flexible office space 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, there 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 3300 centers to 20,000, by the end of the decade. And we're also going to see normalized financials and then from there onwards will have a much clearer path. And that's really what we need for this stock to recover. We need a clear path, which up to now we haven't had so far because of the constant back and forth.
Andrew: 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 shown on a balance sheet, I think hybrid is going to be a huge play going forward, all that 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, 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... When you raise 350 million of equity, you expect all offenses to be really aggressive. And I didn't see a lot of aggression, right? I kind of thought they were gonna buy WeWork in distress or something, or they were gonna buy. And they didn't really do a lot of offense if I remember correctly. So I kind of looked at it and said, Is this a management team that's willing to go be aggressive? Are they too scared? So I want to talk equity raise how you look at the management team, all that sort of stuff. Oops, Swen, I think I lost you again. So I'm gonna go ahead and press pause.
Alright, we lost Swen for a second. He promised me he's got a fast internet connection. I think I've got a fast internet connection. But then I was just asking you, the equity raise at the bottom. I don't feel like they played Super aggressively. And we can talk cap allocation. IWG almost sold itself twice in 2018 and 2019. And those deals ended up following through I will 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 earns 30%. And yeah, he wants to grow up." I don't know. So I just want to turn all that over to you.
Swen: Well, you have a founder who built this from scratch. And by way of him living in Monaco, you will know that he's a heartless capitalist, he set up this company in a way that optimizes 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 he'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 on to 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 down to 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. 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, which 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.
Andrew: Yeah, no, look, I agree with you. My general take on him has been positive. Again, I loved how during 2016 and 2017, when everyone was just loving on we were he was saying, "Look, these are all the mistakes we made, we will 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." I think he was saying at the time 20 or 25% of our revenue comes from ancillary services, running conference rooms, printing is selling drinks and snacks in the lobbies, and stuff. And he's like, "WeWork just not doing that. I think their salary services was 2% of times, you cannot make money at those levels." So he, I think, was very prescient, but at the same time that equity raise dinged me, how the private equity sales falling through kind of I was a little bit concern about that. But I think all that is right.
Let's talk about growth plans. So this is a company right now, with 3000 locations, they want to franchise and partner on a lot of them. But they have some pretty aggressive growth plans. And WeWork marrows them right, they say, "Hey, the future is hybrid. We've already discussed how large companies grow and 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 of a sudden, you want to flip a switch and go capital-light franchise and go from 3k to 20k over the next 10 years." 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?
Swen: Yeah, interestingly 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 plans a little bit because I guess...
Andrew: I could be misremembering a digit. So if it's 30k, instead of 20k, I'm sure that...
Swen: They cut it back to 20k. I guess that just got too much pushback, really? Yeah, of course. So I think there are 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, etc, etc. 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 still.
Andrew: Oops, I think we lost you again. All right. I'm so sorry for the technical difficulties. We've got a... Swen just said the future is a hybrid. And I'll just let them keep going.
Swen: 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 there 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, partnerships with hotels, which is what we spoke about earlier, putting flexible office space solutions into hotels. So if you team up with Hilton or Marriott, you name it and you get 1000 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 towards 10-12,000 in the foreseeable future, and then you have to double it again. It's feasible. I love the fact that they are 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.
Andrew: I like that motto. Let me talk about one last thing on the heels of this. So one of the things that are originally tracking which IWG was that own to a 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've invested a lot into tap, right? When you've got a franchise model, you need to have reasons for people to buy a franchise. And a lot of times that's the brand right McDonald's brand is gonna sell more hamburgers, then what's the what is coming to America thing the McDonald's brand or McDonald's gonna 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 a 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 gonna have more value than a flat space that has one office. So all that makes sense. But they've 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 does this owns a franchise model, we're also looking at a potential corporate action a spin-off." Anybody who's followed this podcast or news and been investing in those spin-offs, or it's been so great.
But I do worry about this acquisition because 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 invest and grow 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 fine for the buyer, right? Surely prior shareholders leaving you with a bag. So I wanted to talk about both the spin-off plans and how you view that acquisition.
Swen: Yeah, so the acquisition itself, a company that offers it's more like an Airbnb for free 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.
Andrew: Just to clarify, this is the management of the company, they bought his major, as well as obviously, the IWG. But this is the company that they bought has big insider ownership.
Swen: Yeah, yeah. And when the management of a company that gets acquired when they were... And they put serious money of their own into it, that gives me a lot of confidence that they're onto something. Would I say that the first idea that you'd have to find a quiet company to do a spin-off in an IPO within 24 months, is the first thing that comes to mind? I think yet again, they're being quite ambitious here potentially a little bit aggressive, when 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, with I have this slide pithead, 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 are given where the stock is currently trading. The stocks not really pricing in any growth right now, the stock is almost as priced for IWG going down the toilet. So, yeah, it doesn't take much in terms of achieving 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 two 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 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.
Andrew: So you mentioned the stock is in the toilet. I just want to ask, the stock price before COVID was 450 to 500. I guess that's pounds per share or whatever, right? Pence, sorry. Today, the stock is about 260. So it's been about cut in half. And obviously, COVID has a lot to do with that, right takes a long recovery. But at the same time, when I look at like an SLGR Bernado, which owns New York City office space, right, their stocks are about a third down from the pre-COVID peaks. And that's New York City, only office space, not worldwide flex office space. So I would say, it strikes me as a little surprising that IWG would be down much further than, and then I'd add on to that, 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 seen that we are not? Or what are we seeing where we're so bullish on this, that the market is not? Oops, looks like I lost you again. I'm gonna pause.
Alright, we're back. I don't know how we're gonna edit this one. So I'm sorry, your listeners. We're having little technical difficulties with Swen. But Swen I guess we'll make this the last question since we're having so many technical difficulties. I look at IWG and I see a stock price that's 50% below where it was pre-COVID. That's much worse than 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 all and I say, what is the market seen that we're missing? Or conversely, what are we seeing bullish that the market is missing?
Swen: Well, there 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 space providers listed on the stock market. The entire sector has had a really bad reputation because of what happened to WeWork. 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 at the lockdowns happened, that did play a role in people's minds. And it's not widely followed really like 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.
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 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 are selling those we get the more cash, then the entire market cap, what around the entire the current market cap. And this being a company that is structured the way it's structured, you could 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 than because of the franchise fees. So I call it an investment that can have potentially long-term and infinite returns in the sense that once you've received your capital back, you own the shares for free, and then anything that comes in, it's just the cream on top. And mathematically it gives you an almost infinite return on your invested capital. I think we're going to see such an event probably in the next world hopefully, or probably in the next 12 to 24 months, a met master franchise deal will be struck. And then you'll see a complete revaluation of this company potentially overnight. And we could also get see a bit for the company, we did have bit 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 buying 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 option given by the sale of a master franchise.
Andrew: Yeah. We'll probably wrap it up here just because of the technical difficulties but I'm with you there's been three credible debt bids for this in the last four years. And I think it makes all the sense of the road, right? A: as you're saying everything that we've talked about is what private equity should be interested in. You can sell this off to the franchisees and get a lot of your money back. You're gonna have this great franchise network where I think there is a really credible argument 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 marketing. It should be really attractive for franchise players." So I just think it would make all sense in the world for private equity to come in. And anything that it makes all the sense in the world for private equity to come in, it probably makes sense for an individual events 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 gonna be tough. So I'm sorry to our listeners. But Swen, anything else you want to say before we wrap it up here?
Swen: Well, first of all, I mean, everyone's invited to take a look at my website, I have a free weekly column in there.
Andrew: I 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 IWG Twitter, Burford, John Menzies. I mentioned four of them already. So Twitter was published 30 minutes before we started recording so spend out here working hard. He's prepping for a podcast and publishing on Twitter.
Swen: Yeah, and besides that, also absolutely love your work that 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. I'll be intently and keenly following your writing as well.
Andrew: Hey, well, I really appreciate that and we'll have to have you back on somewhere. We're happy to have you back on when we lock you down to an Ethernet cord and you've got the telecom company giving you priority Internet access net.
Swen: Well, here's a deal and a suggestion. I go to an IWG meeting room somewhere in London and we'll do it from there.
Andrew: I like that. I like that. Swen Lorenz, thank you so much for coming on. Have a good one.