New Drug to Get $100 Mil. Push Bates: Any Acquisition Value Left?

After its de-merger from Saatchi & Saatchi in 1997, Bates was seen as the more likely of the two ad networks to be acquired in short order. Its Asia Pacific operations made it an attractive prospect to many. By comparison, Saatchi had giant Procter & Gamble as its flagship client, a prickly marketer that would need to bless any union and be assured that it would be conflict-free.

But Saatchi was bought by Publicis in 2000 in a $1.9 billion stock deal, and Cordiant Communications Group, Bates’ London-based par ent, is still on its own and financially troubled. The holding company issued three profit warnings in 2001, reporting pre-tax profit of $37 million, down 55 percent from 2000. Underlying revenue (not including acqui sitions) fell 8 percent in the same period. Also, CCG last year slashed its workforce by 1,100 people, 10 percent of its worldwide staff.

As one of the last stand-alone networks, Bates is no stranger to rumors about suitors circling. Last week, CCG once again squashed reports that it was talking to Havas. The Paris-based holding com pany also issued a terse statement asserting it isn’t “currently in discussions” with CCG.

“We talk to people all the time,” said Simon Gillham, a Havas representative. “We are not in a big acquisition mode.”

Havas CEO Alain de Pouzilhac declined to comment, as did CCG CEO Michael Bungey. Bates Worldwide CEO David Hearn was unavailable.

Nonetheless, sources insisted Havas talked in recent months with CCG, which has a market value of $725 million, according to one analyst.

But the most attractive assets in CCG’s corporate portfolio appear to be either unattainable or not as attractive as they once were, particularly the company’s part ownership of media network Zenith Optimedia Group and its Asia Pacific powerhouse George Patterson Bates.

Havas is said to be most inter ested in CCG’s 25 percent stake in Zenith. An acquisition of CCG would trigger an option to buy the rest of Zenith, now owned by Publicis. Insiders said Publicis CEO Maurice Lévy would never allow Zenith, flourishing as one of the world’s top five media-network brands, to fall into the hands of his French rival.

The other jewel in CCG’s crown, George Patterson Bates, has lost much of its luster in the past year, relinquishing its long-held position as Australia’s No. 1 agency. It has suffered account losses, and its largest client, air carrier Ansett, went bankrupt. Hamish McLennan, heir to the CEO’s suite, bolted for Young & Rubicam. Last month, Ian Elliot, Patterson’s CEO and CCG Australia’s chairman, resigned.

Sources said that during the recent talks with CCG, Havas considered folding Bates into Arnold, one of its two U.S.-based networks (the other is Euro RSCG). Under that scenario, Bates would receive a much-needed boost domestically, and Arnold would gain a stronger presence overseas.

Arnold executives referred questions to Havas.

Possible conflicts in that pairing include Bates’ Brown & Williamson account and Arnold’s anti-smoking client, the American Legacy Foundation. In addition, Bates works for Wendy’s International, while Arnold works on McDonald’s. Sources said Wendy’s, with $240 million in billings, had been meeting with other shops even before merger talks, although a client representative denied that such talks had taken place.

As CCG’s more desirable operations have slipped, the problems at Bates’ weaker offices have worsened. Bates North America was the poorest-performing region in 2001, with revenue off 14.5 percent on an underlying basis. In the past 18 months, it has lost an estimated $400-410 million in billings, including its critical U.S. factory and dealer accounts for Hyun dai, and won only $150 million.

CCG’s higher-margin, faster-growing marketing-services firms are faltering, too. In 2000, Bungey paid $421 million for Lighthouse, an acquisition he’s already written down. (Lighthouse includes design consult ancy Fitch and PR firm Financial Dynamics.) That purchase, coupled with that of Korea’s Diamond Ad—an affiliate of Hyundai that was supposed to solidify that client relationship—caused CCG’s net debt to rise to nearly $250 million last year.

“A lot of those [new CCG] businesses aren’t making money, and the cuts to Bates are killing the agency,” said one source. “Bates is a tired, aging agency. David Hearn is a good guy, but you’d have to be an alchemist to revise the downward spiraling fate of the place.”