The marketing services holding companies’ recent turmoil is well documented in both column inches and their share price. They are struggling with a lifting of the veil on digital marketing; increased competitive tension in everything digital, and the biggest advertisers starting an ‘in-house’ cycle of key marketing functions.
To compound their woes, hedge funds have taken a cumulative $3 billion bet against holding companies shares, with WPP and Omnicom the worst effected (see yesterday’s FT).
WPP’s Martin Sorrell has been the most transparent about how investor activism influencing client board behaviour has contributed to the rather flat financial results reported by the Group earlier this month, and the subsequent £2.7 billion drop in WPP market capitalisation since the end of February.
The private equity universe has enjoyed a relatively benign few years and the industry is currently awash with an estimated £700 billion of un-invested capital (Preqin research). Not all of this “dry powder” will be targeted towards the marcoms groups, but this is an astonishing quantum of money yet to be invested.
Private equity houses will be watching P/E valuations. Twelve months ago, the average forward price to earning valuation of the major marcoms groups was a punchy 16.2x. Today that average is 12.5x, in spite of stock market valuations remaining pretty close to all time historic highs.
This changes their financial models, creating opportunities.
And it has already started: Providence Equity Partners delisted Chime Communications back in 2015; Creston plc went private through its largest investor, DBAY Advisors in November 2016 (Creston management believe there was a £1 million saving day one by not being listed on AIM - one of the least onerous listings); Bain Capital acquired ADK in December 2017, in part from WPP.
Programmes to create internal efficiencies don’t seem to be enough to save the share price. I think we are likely to see something more seismic, at the very least the sale of the less shiny non-core assets but I wouldn’t rule out a very large private equity backed de-listing. Or even a big acquisition play for one of the consultancy groups by one of the more ambitious marcoms groups (read WPP).
And if I had to pick one that’s ripe? My money is on Omnicom.