Inside The Y&R Public Offering
The wheels toward public ownership for Young & Rubicam Inc. were set in motion by Peter Georgescu in 1996. The first outside investor in the agency's long history turned out to be San Francisco buyout firm Hellman & Friedman, which took a large minority stake in Y&R Inc. for $242 million that summer. Three months later, Y&R contracted a $700 million credit facility with Bank of America. The new funds had three purposes: repurchase equity from former chairman Alex Kroll and about 500 other then-current and former employees, award more shares to new senior managers, and beef up investment in areas such as new media, database marketing and research.
Bear Stearns, later tabbed as co-lead underwriter for the initial public offering with Donaldson Lufkin Jenrette, was instrumental in pairing Hellman with Y&R, said sources. Alan Schwartz, the chief of Bear Stearns' investment banking division, was named to Y&R Inc.' s board in 1996, along with three principals from Hellman. (A fifth outside director, former Manufacturers Hanover chairman John McGillicuddy, was added to the board in May 1997.)
In its pitch to Wall Street, Y&R will trade on its well-known name and heritage and show it knows how to win global business and attract new work from a wide range of clients. "In the last few years, the company has been going through a classic case of getting the house in order," says Abe Jones, a managing director at AdMedia Partners in New York. "They must demonstrate the organization is structured with a group of young managers who have a stake in the business and that they have a growth strategy for their various lines of business."
A key question bound to surface: Can Y&R improve and sustain its profit margins, which lag those of the big public ad companies? "With such a recent turnaround [since 1995], they don't have the four- or five-year history of solid margins that cool-headed investors want to see," says one agency financial officer. "And is the company's financial performance being taken out of the hides of the staff?"
Another soft spot, say analysts, is Y&R's acquisition record. Rivals like Omnicom and IPG have boosted revenues sharply by a steady flow of agency purchases, big and small, around the world. As a private company trying to get its balance sheet in shape, Y&R has had little such leverage. As a result, it spent only $41.5 million over the last two years on minor purchases such as Ayer's Media Edge and Waring & LaRosa. It now has plenty of catching up to do in international deal-making. "Y&R's acquisition effort has been dormant," says AdMedia's Greg Smith. "They will have to get back in the game to get their [stock price] up."
On the plus side, Y&R's SEC filing indicates healthy growth in its U.S. revenues, which have climbed around 16 percent each of the last two years. In 1997, the company reported an operating profit of $43 million on U.S. revenues of $661 million. Its European margins were about the same, while Asia and Latin America --as for many other companies--showed losses.
Although Y&R trails Omnicom, IPG and WPP in most key financial ratios, it should benefit from its status on Wall Street as a new player in a relatively uncrowded industry. What's more, the performance gap may work in its favor; investors will be pitched on the likely rise in its stock price as its margins improve and YNR (its ticker symbol) commands a PE multiple closer to the value of the other ad companies.
Industry speculation also points to Y&R buying out Dentsu from the Dentsu Young & Rubicam partnership in Asia or merging with former partner Havas Advertising in Paris to add more bulk. Insiders dismiss both scenarios, insisting the growth of DY&R is based on the cross-cultural capabilities of the joint venture and that past relationships with Havas were too rocky to want to repeat. Y&R and Havas, nonetheless, continue to jointly operate the Mediapolis media buying network in Europe.
Y&R insiders and real estate experts also expect Y&R Advertising may opt to sell its dated Madison Avenue headquarters and move to larger and more contemporary quarters. Published reports have said Y&R is negotiating with real estate developers to buy part of a proposed Times Square office tower. The New York ad agency's some 1,100 staffers could share space with other Y&R Inc. companies, such as Wunderman Cato Johnson, which are spread out among four or five buildings in the city.
As a significant owner, Hellman & Friedman has a voice in all of Y&R's financial decisions, and the firm will continue to play that role after the IPO. At some point, it expects to sell its shares in a secondary offering to generate returns on its investment, says general partner Philip Hammarskjold (a distant relative of former United Nations chief Dag Hammarskjold). The timing depends on "our evaluation of how the company and the market is performing," he says.
Despite its proximity to Silicon Valley, H&F concentrates on acquiring stakes in traditional communications, entertainment and financial services companies. The Y&R deal is the largest investment the firm has made in its $2.5 billion portfolio.--JV
The Numbers On Y&R Inc.: Thank God For EBITDA!
Total revenues.....$ 1,085.....1,222.....1,383
General & administrative expenses.....357.....392.....464
U.S. revenue.....$ 492.....571.....661
Asia/Latin America revenue.....182.....206.....249
Figures in millions. *1996 includes $315m recapitalization charge; others primarily asset writedowns