Just days before final bids were due to be received in a proposed sale of The Executive Centre, the shareholders of the Hong Kong-based shared office provider have halted the sale, according to a statement received by Mingtiand from the company.
HPEF and CVC Capital Partners, together with the company’s management, have made the decision over fears that the value of the company’s business could be affected by political tumult in Hong Kong, where The Executive Centre has ten of its 130 locations.
The announcement by The Executive Centre puts an indefinite hold on what was reported to be a $750 million transaction, and comes as the We Company, the parent firm of shared office giant WeWork, has cut its valuation by around 58 percent as it struggles to launch an IPO in the US.
Paying for Hong Kong’s Tumult
The Executive Centre said in its statement that Hong Kong accounts for 30 percent of its earnings before interest, tax, depreciation and amortization, which for the business as a whole is on track to achieve $46 million this year.
“While the shareholders have decided to pause the sale process at this time, Hong Kong remains one of The Executive Centre’s core markets,” said The Executive Centre’s founder and CEO, Paul Salnikow. “We are the clear market leader, as evidenced by our continued strong performance and growth momentum, and our strategy to further expand in the market remains unchanged.”
The decision to pause the sale, which was first reported by Reuters, delays a months-long process which was slated for completion in late September. Hong Kong’s Retail Management Association has said that most retailers saw sales plunge by 50 percent last month, while ongoing protests are expected to pitch the city into a recession.
The company now says it will consider recommencing the sale once the city’s politics stabilise. A number of parties which had progressed to the final round of the sale process, continue to express a strong interest in acquiring The Executive Centre, according to the company.
Bids Due in Late September
Hong Kong-based HPEF Capital Partners, which was formerly HSBC Private Equity, owns 70 percent of the shared office operator, while Luxembourg-based CVC Partners owns a further 20 percent, with the remaining ten percent held by CEO Paul Salnikow, who founded the company in 1994.
The company has carved a niche for itself in the crowded flexible office market as a luxury alternative catering to a clientele more interested in 5-star amenities than exposed brick. The Executive Centre’s facilities offer tenants plush leather sofas and private suites in place of the free-flow beer, ping pong tables and shared sofas made popular by WeWork and its imitators.
Reports that WeWork is likely to reduce the valuation of its planned IPO to under $20 billion, after initially gunning for $47 billion, or even shelve the offering altogether, would also have created a more challenging environment for other companies marketing shared office opportunities.
Although the sale price, or any interested parties, have not been made public, sources cited by The Financial Times just over four months ago indicated that the deal could value the company at $750 million.
Hong Kong Income Rises Despite Protests
Recent events in Hong Kong have begun to put pressure on the office leasing market in a city that has seen continual rent increases and tight office vacancy for the past decade.
Office vacancy in Central – where The Executive Centre operates locations in One IFC Hong Kong, Three Garden Road and The Hong Kong Club Building – hit a ten-year high in July.
The continual rise in office demand in Hong Kong, and the other Asian urban hubs where The Executive Centre focuses its business has been kind to the serviced office provider.
The company had a turnover of $200 million last year, according to Salnikow, who also said last year that the company had grown at a rate of 20 percent annually over the past ten years.
Despite a slowing Hong Kong economy in 2019 and the protests that have rocked the city since June, This year, The Executive Centre’s revenue up to August increased 27 percent in Hong Kong compared with the same period last year, with revenue up 27 percent in July and 40 percent in August despite the protests.
Riding the Flexible Office Wave
Salnikow’s The Executive Centre has been providing flexible space to corporates long before co-working operators started thinking of leasing desks to HSBC and AB Inbev.
Pitched as a high-end option geared towards multinationals and financial companies, the company has built a portfolio of 130 centres in 32 cities across Asia Pacific, setting itself up as the “business class” of share offices versus its “economy class” competition. That distinction allows The Executive Centre to charge a 50 percent premium over rival WeWork for its grade A offices in core locations, according to Salnikow.
As the latest sign of the impact of Hong Kong’s turmoil on real estate investment in Hong Kong, the decision to pause the sale of the Executive Centre follows two months after logistics specialist ESR postponed a Hong Kong IPO expected to raise up to $1.24 billion, which the company said was due to market conditions.