The biggest-ever merger between advertising agencies may set off a wave of deals among the competition.
Publicis Groupe SA (PUB) and Omnicom Group Inc. (OMC:US) agreed this week to merge, creating a $35 billion company with ad shops including BBDO Worldwide and Saatchi & Saatchi. The announcement sparked rallies in Interpublic Group of Cos. (IPG:US) and Havas (HAV) SA to the highest in about a decade and MDC Partners Inc. (MDZ/A) to a record, with Publicis Chief Executive Officer Maurice Levy telling Bloomberg Television the gains are a sign traders see more consolidation.
“Other large ad agencies are going to look to come together,” Richard Tullo, a New York-based analyst at Albert Fried & Co., said in a phone interview. “They’ll be competing with this big entity that’s now at the top of the food chain.”
The marriage of Publicis and Omnicom to become the world’s biggest agency may spur WPP Plc (WPP) to seek acquisitions of its own to regain its leading position in the industry, according to Bank of Montreal. Havas is one of the last available targets and could lure WPP, according to Natixis. A merger between Havas and Interpublic (IPG:US) is another possibility, said Liberum Capital Ltd., which also sees MDC Partners as a potential target.
Advertising agencies have never before struck a deal this large, according to data compiled by Bloomberg. The stock swap means shareholders of Paris-based Publicis and New York-based Omnicom will each hold about 50 percent of the new entity, which the companies said will have a market value of about $35 billion and generated $23 billion in annual revenue last year.
A representative for the companies referred to comments Levy made yesterday to Bloomberg Television’s Tom Keene and Sara Eisen. The CEO said yesterday’s surge in ad-firm shares shows that investors are betting that more tie-ups between competing agencies “is something that is going to happen.”
Havas and Interpublic are now “the last two decent-sized targets” left in the industry, Jerome Bodin, an analyst at Natixis, wrote in a July 29 note to clients.
Interpublic surged 4.7 percent yesterday to a more than nine-year high of $16.61, leaving it with a market value of $7 billion. Havas gained 4.7 percent to an 11-year high of 5.66 euros, valuing it at 2.2 billion euros ($2.9 billion).
Today, Interpublic rose 1 percent to $16.77, while Havas climbed 0.4 percent to 5.68 euros.
Although Havas likely prefers to expand more on its own before exploring a sale, WPP would be a natural buyer for the Puteaux, France-based company, lured by the chance to bolster its media-buying foothold, Bodin wrote. Havas’s biggest shareholder is French billionaire Vincent Bollore, with a stake of about 37 percent.
Havas also could join with New York-based Interpublic, which would find the European company’s balance sheet and simplified structure attractive, according to Ian Whittaker, a London-based analyst at Liberum.
“For IPG and Havas, it would be this whole idea that you build scale,” Whittaker said in a phone interview, referencing Interpublic’s stock ticker. While Havas has said it doesn’t need to get bigger, a marriage of Publicis and Omnicom may make the agencies feel like a tie-up is “something that they need to do,” he said.
“We’re not interested in playing the bigger-is-better game,” David Jones, CEO of Havas, said yesterday in a phone interview. “Our clients want us to be faster, more nimble, agile and entrepreneurial -- not bigger, more bureaucratic and more complex. I’m sure, however, that there will be more consolidation in the industry and that we haven’t heard the last word.”
Michael Roth, chairman and CEO of Interpublic, wrote in an internal memo to employees following the Publicis-Omnicom deal announcement that “as this weekend’s surprising news shows, there’s no telling what might take place, but we don’t see the need for major M&A to keep delivering on our plan to move Interpublic forward.”
Tom Cunningham, a spokesman for Interpublic, said the company declined to comment further.
MDC Partners (MDCA:US), a New York-based firm, also could be a potential target, according to Whittaker. The ad agency has a market value of $754 million and brought in $1.1 billion in revenue last year.
Shares of MDC Partners jumped 4 percent yesterday to close at a record $24. Today, MDC Partners rose 0.4 percent to $24.10.
“Consolidation will continue to accelerate,” Miles Nadal, CEO and chairman of MDC Partners, said in a phone interview. “We are a company whose control block remains in the hands of shareholders so I think, by definition, we are a company that anyone could bid for. We hope that it’s not in the short term because we love the business and we love our growth prospects but ultimately we work for the shareholders.”
WPP, with a market value of 15.8 billion pounds ($24 billion), could seek acquisitions to counteract a potential loss of its leading market position after an Omnicom-Publicis deal, Daniel Salmon, a New York-based analyst at BMO, wrote in a July 29 note.
“Being No. 1 is a significant source of pride for WPP,” according to the note. “We don’t expect it to sit idly and let this merger define the competitive space.”
Martin Sorrell, the founder and CEO of London-based WPP, said during an interview with Bloomberg Radio yesterday that he didn’t think further consolidation was necessary, adding that the merger of Publicis and Omnicom will spur their clients to reassess their contracts.
“There’s a state of equilibrium that gives us a chance really to build organically,” Sorrell said.
WPP fell 0.8 percent to 1,173 pence.
Dentsu Inc. (4324), which acquired British advertiser Aegis Group Plc this year for 3.16 billion pounds, also could be driven to pursue deals to bulk up even further, according to Brian Wieser, a New York-based analyst at Pivotal Research Group.
Publicis and Omnicom will enjoy an “overwhelming advantage when it comes to pricing,” Wieser said in a phone interview. The other major entities “don’t want to be left out.”
There’s only a 50 percent chance that Publicis and Omnicom get the regulatory clearance they need to complete the deal, said Albert Fried’s Tullo. Even if the transaction is blocked by U.S. or French officials, that won’t stop others from attempting takeovers, he said.
“They’re going to get a lot of scrutiny” from regulators, Tullo said. “That doesn’t mean there’s not going to be more consolidation.”
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