Shareholder group boosts stake in drive to block deal that values the once-$2.2 bil. company at $17 mil.
WPP's bid for Cordiant Communications Group ran into opposition late last week from the beleaguered holding company's largest investor, Active Value, which increased its stake to just below the 25 percent needed to block an acquisition.
When Active Value's London fund managers learned shareholders stood to receive only about $17 million, or 4 cents a share, under terms of the deal—approved earlier in the week by CCG creditors and management—they made their anger known. Active Value had a nearly 17 percent stake in the company when trading in CCG on the London Stock Exchange was suspended June 16; when trading resumed Thursday, the fund boosted its share to about 24 percent, buying another 30 million shares.
Active Value, which has lost an estimated $50 million on its investment in CCG, declined to comment. It is unclear what leverage, if any, the fund has in exacting better terms. If anything, it appears Active Value stands to lose what little it might have made in WPP's bid. Should CCG shareholders reject WPP's $445 million deal, the financially strapped parent of Bates will be thrown into bankruptcy, with shareholders receiving nothing and WPP, as a secured creditor, taking possession of the assets.
Ironically, that is the outcome WPP CEO Martin Sorrell fought to avoid the past few weeks, criticizing French rival Publicis Groupe's plan to push CCG into insolvency and share the assets with Cerberus Capital Management, which owns $131 million of CCG's debt.
"[Active Value] thinks they can extort some greenmail and try to stop the deal, but they're just going to drive the company into [bankruptcy]," said an exec close to the transaction.
Active Value has suggested that it has lined up allies among other institutional shareholders, but CCG sources denied that.
As CCG bidders have swooped over the remains of the $19 million company—which only three years ago boasted a market value of $2.2 billion—those charged with looking after Cordiant shareholder interests were preparing for their own futures. CEO David Hearn, on the job for just 15 months, will pocket $3.3 million as the result of a recently negotiated payout plan (Adweek, June 9).
It's proved to be an ignominious end for a company whose roots in Ted Bates once embodied the zeal of City investors. Bankrolling the Saatchi brothers' global ambitions as epitomized by Bates, investors helped to trigger a restructuring of the American advertising landscape and establish, for a time, U.K. holding companies as a world force.
The CCG acquisition would propel London-based WPP higher in that global pecking order, moving it into the No. 2 spot among industry holding companies, after Omnicom. While Publicis CEO Maurice Lévy insinuated, in public comments, that WPP overbid to win an ego-fueled battle, analysts said Sorrell got CCG at a fair price in a down business cycle that is showing signs of an uptick.
While many industry deals are set at three times revenue, this one went for less, given the pending asset sales, said Paul Richards, an analyst at Numis Securities, London.
WPP also wins praise for not taking on debt to finance the transaction. On Thursday, WPP raised $166 million by selling 20.6 million of its own shares. The company stands to gain from the planned sale of CCG's Australian and German agency operations, as well as London PR firm Financial Dynamics, which should reduce debt by a total of $141 million. WPP also has Publicis' $125 million option to buy the remaining 25 percent stake in ZenithOptimedia.
After the asset sales, CCG would be left with $166 million in debt, projected revenue of at least $498 million pounds and margins expected to improve from 7 percent to 10 percent.
"It's important that you do a deal like this without putting extra pressure on your corporate credit profile, and WPP is avoiding that," said Trevor Pritchard, director of corporate ratings at Standard & Poor's in London.
The deal calls for WPP to buy $294 million of Cordiant debt at par. The remaining $131 million in debt, held by New York hedge fund Cerberus, is still under negotiation. Earlier in the struggle for control of CCG, Cerberus irked WPP after it revealed it had entered into an exclusive deal with Publicis and acted to quash WPP's initial bids.
A shareholders meeting is set for July 22, with a court date to approve the transaction scheduled for Aug. 4. Original terms of the transaction anticipate the deal's completion by Aug. 5.
WPP said the addition of CCG's assets bolsters the company's relationships with shared clients—including British American Tobacco, Pfizer, Heineken, Estée Lauder, Johnson & Johnson, Kraft, Microsoft, Nokia and Roche—which comprise 25 percent of Cordiant's revenue. The acquisition also helps WPP's position in Asia Pacific and Latin America; WPP said its goal is to see a third of its business come from those regions. WPP said other attractive holdings are CCG's 141 marketing-services unit, Healthworld and Fitch design operations.
WPP said it expects to align Bates' offices with J. Walter Thompson in the U.S., Red Cell in Europe and Young & Rubicam in Asia. The Bates name may remain in some areas, such as in Spain, where CCG works for car manufacturer Seat and WPP for competitor Ford.
Former CEO Michael Bungey could not be reached for comment; Hearn declined to comment. In an interview last year, Bungey addressed the wisdom of buying below-the-line unit Lighthouse Global Network in 2000 at a hefty $421 million, which helped to saddle CCG with its current debt load. "I don't regret [it] at all, though with hindsight, if you were buying them today, you'd definitely pay less money, or you wouldn't buy them at all," he told the Guardian.
The aggressive South African duo that runs Active Value, Julian Treger and Brian Myerson, played a behind-the-scenes role in forcing Bungey out last year. But given the current scenario, they may not have moved fast enough.
"This [deal] is fairly unusual," observed S&P's Pritchard. "The choice for shareholders is between getting a little something as opposed to getting nothing. It's a fairly stark choice."