‘An ordinary course of business’: Why agency holding groups could be the next arbitrage target for private equity investors
By Seb Joseph
Times of uncertainty tend to be times of opportunity for private equity investors, so it makes sense they’re looking at the ad industry.
Specifically, the agency holding groups.
Publicis may have denied a report from Campaign that it has held talks with a private equity investor about a possible deal but conversations like this are par for the course right now.
“These conversations are an ordinary course of business for big companies that find themselves in the positions the holding groups do now,” said Jim Houghton, partner at M&A advisors Waypoint.
They may be hulking, legacy businesses, but the agency holding groups represent something that’s like catnip to private equity investors — an arbitrage opportunity.
Whether its Publicis or IPG, these are businesses private equity investors can buy relatively cheaply and then, after steering them through a transition of intense cash flow and margin improvement, sell up. It’s the classic private equity move to juice profits on undervalued assets.
Sure, the agency holding groups are underperforming right now but not to the point that the bind they’re in is unbreakable. Otherwise, organic growth for the four largest publicly traded agency holding companies would be a lot worse than the low single digit declines they have posted.
Look at it another way: the disruption agencies are going through means there will be winners and losers private equity investors can make money on regardless.
“We haven’t seen deals of this kind before, but that doesn’t mean it couldn’t happen given the cost of borrowing money is low and private equity investors have a lot of money to spend right now,” said Sarah Simon, analyst at Hamburg-based investment bank Berenberg. “Any deal like this is likely to mean a temporary exit from the public markets for an agency holding group before an eventual return — unless it was acquired,” she said.
Publicis may be the only agency holding group openly linked to a private equity investor, but there are reasons for and against deals for all of them.
Here’s a breakdown: Publicis is cheaper than its competitors and arguably further into its restructure plans than them, but question marks remain over whether it has placed the right bets on data management with Epsilon and internal organization via Marcel: So much of WPP’s success rests on its ability to beat rivals to new acquisition targets, but it will generate tons of free cash flow thanks to GroupM — the biggest media buying agency in the world: On one hand there are questions over the succession plans at the top of Omnicom and IPG which could present a vacuum for private equity investors to fill. On the other hand, however, those businesses will cost just as much — if not more — than their European counterparts so may be less appealing as an arbitrage opportunity
“The big private equity houses will always be circling the big businesses, always checking in, agitating, ready to pounce when the timing is right,” said Barry Dudley, partner at M&A advisors Green Square.
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