Active Value Riles WPP, Vexes Analysts

Active Value, the largest shareholder in Cordiant Communications Group, continued to be a thorn in the side of the CCG board and WPP Group’s Martin Sorrell last week, buying up enough shares to block an acquisition of the beleaguered holding company.

The move signals that the London investment fund is prepared to take Sorrell up on his threat to put CCG into administration, the U.K.’s equivalent to bankruptcy, if WPP’s $445 million bid for the ailing company is rejected by shareholders. WPP became CCG’s lone creditor last Thursday when it bought the remaining $131 million in debt, previously held by New York hedge fund Cerberus Capital Management. WPP said it paid $18.2 million over the par value paid to the rest of the holders of CCG’s $424 million in debt.

Should Sorrell force CCG into administration, analysts noted that it isn’t necessarily a fait accompli that WPP will take possession of the company. But sources said Sorrell has a plan for blocking overtures by rivals.

Under U.K. law, an administrator would be required to accept the highest bid for the assets, meaning rival holding companies could in theory enter the fray and prompt a bidding war for individual CCG assets or, theoretically, the whole company, analysts said. “I’m not convinced that WPP would have a monopoly on those assets,” said Anthony de Larrinaga, an analyst from London-based SG Securities. “An administrator must accept the highest possible price, even if it weren’t WPP.”

However, sources said Sorrell plans to file a pre-packaged administration deal to prevent other bidders from encroaching.

After meeting the 25 percent threshold needed to block a takeover, Active Value raised its stake to more than 26 percent by last Friday. It cannot go above 29.99 percent without triggering a full bid for CCG. Were it to do so, it would have to offer the highest price it paid during the past year, or about $1.25 per share—a huge premium compared to the 4 cents that CCG shares closed at on Friday.

Active Value’s buying spree led many analysts to question its motivations. The investment fund, led by South African duo Julian Treger and Brian Myerson, declined to explain its reasoning for fear it would give Sorrell the upper hand.

“I don’t see how 26 percent gets them any further than 25,” said Simon Lapthorne at Old Mutual in London. “It might just be a monumental bluff, but it’s a pretty risky one.”

Some viewed it as an effort by Active Value to force Sorrell to increase the $17 million —or 4 cents a share—he was offering shareholders as a part of WPP’s proposed deal. However, sources said WPP has not engaged in talks with Active Value about sweetening shareholder terms.

In a memo to shareholders last Wednesday, the CCG board reiterated its support for the WPP acquisition and urged shareholders to vote down Active Value’s recapitalization proposal at an extraordinary general meeting on July 23. Active Value’s plan, which calls for CCG to replace current management with Leo Burnett veteran Richard Wheatly as executive chairman and former WestLB vice chairman Stephen Davidson as finance director, was “regarded by the board and the lenders as impracticable,” Dr. R. Stomberg, a CCG senior independent nonexecutive director, wrote in the memo.

Meanwhile, WPP is pushing for CCG’s stock to be delisted from the London Stock Exchange before shareholders vote on its bid for the company at a meeting also set for July 23. Delisting the shares would keep in place the value of the $120 million option Publicis Groupe has for the 25 percent ZenithOptimedia stake owned by CCG. If CCG shares remain listed after approval of a takeover, the value of Publicis’ option may be “materially reduced,” said a source.

An annual report that revealed hefty paydays to departed CCG executives also added to shareholder angst last week. The report disclosed that former CCG CEO Michael Bungey was paid $1.2 million as a result of his termination. “There is a huge debate over how much departed executives should be paid for screwing up,” said Lapthorne. “That’s what really sticks in the craw of shareholders.”