IPG May Be Affordable, But Is It Also an Attractive Target?

NEW YORK Interpublic Group stock closed the week below $8 for the first time in 15 years, when it dropped to $7.86 on Friday, taking IPG across a threshold of takeover vulnerability previously unthinkable to the industry's first holding company. On June 5, when IPG first announced its foray into the capital markets through a special purpose entity called ELF, sources said the company expected there to be a negative reaction to the complicated capital markets transaction, which would bring IPG $750 million. But the drop since then has surprised even IPG insiders, with shares down 17.5 percent and showing no signs of stabilizing. At current trading levels, the industry's No. 3 player has a market capitalization of just $3.4 billion, almost half of what it was a year ago, and just a fraction of its two larger rivals: WPP is valued at $14.1 billion, and Omnicom at $14.6 billion. The company's enterprise value, a theoretical takeover price calculated as market cap, plus debt and preferred shares, minus cash and cash equivalents, is $4.12 billion, as of Friday. Sources close to troubled IPG believe it has not yet received overtures from either private equity investors or other holding company competitors. An IPG rep declined comment. Still, the buzz surrounding the future ownership of IPG rises with every downtick in stock price. "Everyone is watching the stock, but watching from a distance," said one source. "The uncertainties are a problem. Sometimes high risks carry high rewards. It's not so clear here that the risks don't outweigh the rewards." Despite its recent problems, IPG is clearly the industry's last crown jewel of an acquisition, with $6.3 billion in revenue from a wide swath of blue-chip marketers. While networks like the struggling Lowe and Draft FCB are still being restructured, operating units like McCann Worldgroup, Jack Morton, R/GA and Weber Shandwick are considered very attractive assets. Sources said there's been interest about IPG among private equity firms in recent months. Strategic investors like Publicis and Havas are also closely following IPG's price decline and considering their options, sources said. For either of those companies, acquiring IPG would topple the industry's current hierarchy and catapult their positions. For Publicis, IPG would create a holding company with $11.3 billion in revenue, surpassing Omnicom as the industry's largest player. If Vincent Bolloré bought IPG, Havas, with $8.1 billion, would leapfrog to the No. 3 spot, behind Omnicom and WPP; if he succeeds in acquiring Aegis, the new $9.5 billion concern would be No. 2 behind Omnicom. For Maurice Lévy, in the twilight of his career as CEO and considering his own legacy, the deal would propel No. 4-ranked Publicis, which has long nipped at the heels of larger competitors, into the top global spot. Havas' Bolloré, meanwhile, is said to be very serious about carving out a significant industry presence. Having sold off assets in which his heirs lack enthusiasm, he's repositioning the family company along the lines of his children's interests. Said one observer about a possible blood fight for IPG: "This business has been consolidating for a very long time; there aren't any more companies like IPG. Should this day come, it locks into play the top three."Publicis' Lévy declined comment; Havas reps didn't respond to Adweek inquiries. An IPG rep responded: "Recent success in putting reporting issues behind us means that we are now fully focused on improving margins and making the operational and strategic decisions that will position our agencies for competitive growth. We are in the early stages of our turnaround, and the best way for us to maximize shareholder value continues to be by improving operating performance, not by considering a sale."Given IPG's recent history, any acquisition would be complicated. Upon closer look, it's unlikely private equity investors—seeking asset sales and attractive near-term returns on their investment—would end up with the company. IPG is carrying a debt load of $2.2 billion, almost all of which has change-in-control provisions, which would trigger immediate payment. Some of those provisions contain sweeteners that provide for payment in terms most advantageous to note holders. In addition, because a lot of IPG's debt is subordinated—debt that is not necessarily held at the holding company but at the operating units and overseas—there could be statutory issues, which would require time to resolve. An asset sale such as McCann Worldgroup would not only pile on crippling debt at the remaining assets of IPG, but would ring up a huge tax bill for the acquirer because McCann's tax base is so low, sources said. Another tricky challenge for private equity firms is the fact that nearly 70 percent of IPG's 436.2 million shares are in the hands of just 10 institutional holders. None of them are acting as corporate activists, presumably having bought the shares as an undervalued stock in an attractive sector. One of those investors, Tim Fidler, svp, portfolio management at Ariel Capital Management, which owned 9.13 percent of IPG shares as of March 31, said he thinks CEO Michael Roth is doing a good job, even if he wishes for quicker improvement at the company. Fidler attributes IPG's recent stock drop to "less of a decline in fundamentals than the situation where they have to feed cash flow through external sources to get through this [turnaround] process, which is taking longer than we all thought." He added: "The one thing that has always given us some confidence in IPG ... is there's lots of value in its assets…We'd be less patient if we saw substantial degradation in agency brands." Marketers, too, wield considerable influence. For instance, Hellman & Friedman's offer for Grey failed because key clients like Procter & Gamble disapproved. Strategic investors, who would continue to operate the business, are likely to face fewer obstacles with those marketers as well as with bondholders. WPP's acquisition of Grey, which brought rivals P&G and Unilever under one roof, is testament to the loosening of conflict strictures that might otherwise hinder Publicis, with P&G. (IPG is a major player on Unilever's roster.) Given IPG's junk debt rating, another industry company might actually be able to service the company's debt at lower costs. As the last five years of top regime change and turnaround efforts have shown, there's no quick fix for IPG. But even for industry insiders with a better grasp of IPG's problems, the most rigorous due diligence won't answer uncertainties about the SEC investigation into IPG accounting practices—and possible penalties involved—nor reveal the depth and breadth of the weaknesses in the company's financial reporting systems. (That SEC investigation does not preclude a change in ownership, but a hostile approach to IPG would obviously limit the amount of information a potential acquirer could learn about it.) IPG is beginning to make some progress in paying clients outstanding media credits, for which it has put $240 million in reserve, with sources saying that IPG could owe "well short" of that amount.However, there are still enough unknowns about the company's balance sheet that would put off investors from outside the industry and attract only the most confident of those from within. "[Potential acquirers] may have kicked the tires and looked at the dashboard, but it's a different thing to drive it and still not get the right signals," said a source. "If there's a 'there' there, it will probably be a strategic buyer, someone like a Maurice [Levy] or a Martin [Sorrell] who says, 'I'm the odometer, I'm the gauge.'"

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IPG May Be Affordable, But Is It Also an Attractive Target?

Andrew McMains

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