Highly-Leveraged Cushman & Wakefield IPO: Undervalued But Risky
- Founded after the merger of DTZ, Cassidy Turley and Cushman & Wakefield, Cushman & Wakefield is a real estate services firm managing 3.5 billion square feet of commercial real estate.
- The management has been able to grow Adjusted EBITDA to $529 million from 2014 in 2017, showing a growth of 57%. Revenues increased by 65% in the last two years.
- It is trading at a discount as compared to comparable peers because of its high debt. It will have to make payments equal to $3.0 billion in 3-5 years.
Growing EBITDA through consolidation efforts, Cushman & Wakefield (NYSE:CWK) could be an interesting opportunity. With that said, it is also a very risky bet because of its leverage. It is being sold at a discount as compared to peers because of large debt that will be payable in 2021. Finally, goodwill and intangibles comprise of 52% of the assets, thus there is also impairment risk on this name.
The best teams on Wall Street are working on this IPO. The following is a list provided in the prospectus:
Business: Growing Through Consolidation Efforts
Founded after the merger of DTZ, Cassidy Turley and Cushman & Wakefield, Cushman & Wakefield is a real estate services firm with a brand of over 100 years of leadership. 48,000 employees work in approximately 400 offices in 70 countries, and CWK manages 3.5 billion square feet of commercial real estate space.
In the past four years, the company has been able to transform the business driving operating efficiencies, realizing cost savings and enhancing financial performance. The management has been able to grow Adjusted EBITDA to $529 million from 2014 in 2017, showing a growth of 57%. In addition, the company has been able to position itself as one of the top three real estate services providers in terms of revenue and workforce in the United States. With that, the company notes in the prospectus that it is ready to continue growth through further consolidation efforts.
Employees and Facilities
In December 2017, the company had 48,000 employees, including commission based employees in the United States and salary-based employees in Europe and Asia. The prospectus does not provide information on how many employees receive fixed salary, which could be quite useful. The following lines provide more information in this regard.
Regarding the company’s facilities, Cushman & Wakefield leases offices. The business seems to be very cyclical, thus owning properties does not seem to be interesting for Cushman & Wakefield. The company’s principal executive office is located in London, and 215 offices are leased in America, 133 in EMEA and 54 in Asia Pacific.
Goodwill and Intangibles Comprise of 52% of the Assets
Since the company was created as a result of several mergers, Cushman & Wakefield shows large amount of goodwill, $1.7 billion, and intangibles, $1.3 billion. These assets may represent a serious risk for the shareholders. If accountants believe that the goodwill and intangibles should be impaired, the value of the assets will diminish. As a result, the share price could decline sharply. The image below shows the assets before the IPO:
With that, the asset/liability ratio is close to one, which may not be appreciated by the investors. As of December 31, 2017, the company shows $2.7 billion in long-term debt, which will be reduced after the IPO. Have a look at the image below, which shows the liabilities:
Growing Revenues, But No Positive Net Income
Revenues increased by 65% in the last two years to $6.9 billion in 2017. With that, the company is paying large amount for cost of services, and the operation results are negative. Cushman & Wakefield reported -$410 million and -$170 million in operating losses in 2015 and 2017 respectively. It is positive that losses decreased by 58%. If the company continues with this good trend, the stock could retain the attention of investors. With these figures in mind, the market will review closely the bottom line in the next quarterly results.
With that said, be sure to check the interest expenses. The company paid $183 million in 2017. If Cushman & Wakefield pays its debt after the IPO, these expenses will diminish, which could enhance net income. As a result, the market will also check the interest expense line in the next results. Have a look at the image below for further details:
The contractual obligations and commitments before the IPO seem a bit worrying. The company will have to pay $2.8 billion in debt obligations and $844 million in operating lease obligations, which are not small amounts.
As said, the company will use $470 million to repay some debt, and $130 million to repay some other obligations. Investors should expect further equity transactions since Cushman & Wakefield will have to make payments equal to $3.0 billion in 3 to 5 years. Bear in mind that new sale of equity may lead to share price depreciations.
Some Words On Seasonality
Investors willing to follow the stock throughout the year will appreciate the following note on seasonality. The company expects to have revenue increases in Q4 and low revenues in Q1. With that, buying the stock in February/March and selling around December may be interesting. The following lines provide further information in this regard:
Capitalization and Valuation
After the IPO, the company expects to have $713 million in cash, 2.585 billion in the first lien loan, which matures on November 4, 2021, and had a weighted average effective interest rate of 4.79% in 2017. It is beneficial that the second lien will be fully paid with the proceeds from the IPO. Additionally, preferred stock or any other type of convertible security does not seem to exist. The image below provides further details:
With $2.6 billion in debt and $0.7 billion in cash after the IPO, the net debt will be equal to $1.9 billion. With 215.5 million shares outstanding after the IPO at $17 per share, the market capitalization will be equal to $3.663 billion. In total, the enterprise value will be equal to $5.56 billion. With an EBITDA growth of 10%, 2018 forward EBITDA would be equal to $581 million. Taking these figures, Cushman & Wakefield trades at 9.6x, which seems low as compared to other peers:
CBRE Group, Inc. (CBRE), with 80,000 employees, enterprise value of $18 billion and debt of $3.3 billion, is trading at 12.75x its EBITDA.
Jones Lang Lasalle Inc. (JLL), with 82,000 employees, enterprise value of $9.5 billion and debt of $1.81 billion, is trading at 12.95x its EBITDA.
Colliers International Group Inc. (CIGI), with 12,000 employees, enterprise value of $3.23 billion and debt of $0.4 billion, is trading at 12.89x its EBITDA.
Savills Plc (OTCPK:SVLPF), with 26,000 employees, enterprise value of $1.74 billion and debt of $0.149 billion, is trading at 9x its EBITDA.
Cushman & Wakefield is trading at a discount as compared to comparable peers because of its high debt. With this information in mind, Cushman & Wakefield seems like a risky bet. If EBITDA improves and the company can pay debt maturing on November 4, 2021, the share price will increase. If this is not the case, the company will lose market capitalization at a high pace until 2021. With the information we have as of today, paying $2.5 billion in debt in 2021 seems unlikely without a new sale of equity.
Shareholders: Low Interest From Institutional Investors
The fact that the company does not show institutional investors other than DTZ Investment Holdings is a bit worrying. Did the company not contact large institutional investors before executing the IPO? The image below shows the list of shareholders:
With that, it is also not ideal that Cushman & Wakefield will be a controlled company. The Board of Directors could act benefiting large shareholders and against the interest of minority shareholders. Regarding this matter, Cushman & Wakefield noted that the Board is expected to be independent, but the risk still exists:
Cushman & Wakefield is being sold at a discount as compared to other international peers from the same industry. The company’s high financial risk is the main reason to understand the current undervaluation. Holding shares of this company may be very risky. Finally, the large amount of goodwill and intangibles add some operational risk to the equation.
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