Will Publicis Groupe Now Attempt a Hostile Takeover of Omnicom?

On the heels of the collapse of the proposed Publicis-Omnicom merger, there is no evidence such a move is under consideration. However unlikely a hostile bid may be, some observers wonder if the detailed report from Natixis—which is associated with Group BPCE, the second-largest banking group in France—is a trial balloon.

It wouldn’t be the first time Publicis chief Maurice Lévy has attempted something like this. In late 1997, Publicis made a $570 million hostile bid for True North Communications after the breakdown of a European joint venture with the company’s Foote, Cone & Belding unit. (It was rejected, and True North was eventually acquired by Interpublic.) At the time, Publicis was True North’s largest shareholder, and the offer came after Lévy was spurned in his efforts to combine the two companies’ ad networks.

Natixis media analysts Jerome Bodin and Pavel Govciyan did not respond to Adweek inquiries, nor did Lévy. Omnicom declined to comment.

Natixis isn’t the first to raise this possibility. Late last week, Pivotal Research Group senior analyst Brian Wieser also suggested it in a research note. “Publicis always had clear designs towards gaining scale. Towards that end, a scenario which might be worth considering now is Publicis raising capital and bidding for Omnicom outright with a mix of shares and cash,” he wrote.

Wieser told Adweek: “It’s possible that Publicis does [a takeover bid], certainly, and I think it’s doable. The question is whether or not they would pay enough to compel Omnicom shareholders to sell.”

While conceding that all this is just speculation, Wieser added, “If we were taught nothing last summer [when the Publicis-Omnicom merger was announced], it was to expect anything. Always in the back of my mind, I thought the Omnicom merger was a Publicis acquisition by stealth. All the social issues around the merger collapse were about Omnicom not willing to sell. While Publicis was saying ‘We’re going to do everything as equals,’ that meant the Publicis way was the equal best way.”

Many risks come with such a bold move—including alienating clients and key talent, stretching Publicis’ borrowing resources and dealing with whatever anti-takeover defenses Omnicom has in place. (Still, there are precedents such as WPP’s initially unwelcome bids for J. Walter Thompson and Ogilvy & Mather that were ultimately successful.)

Nonetheless, Natixis is undaunted in its suggestion that a Publicis overture could work, and the firm estimates its takeover of Omnicom, as opposed to a merger, would “probably” increase cost synergies by €1 billion versus €500 million. Publicis has virtually no debt, and could raise as much as $2 billion and issue equity while contemplating the sale of smaller Omnicom assets in which it has no interest.

“Such a deal may seem surprising, but we believe that it is perfectly feasible from the legal and financial standpoints,” said Natixis. “The financing and [euro-dollar] exchange rate conditions in particular are very favorable at present. Obviously, the risks are not zero, but they are perfectly manageable in our view. This scenario would enable Publicis to carry out a deal that it firmly believes in. But also—and more importantly—to impose its central management, its methods and thus its growth model. The deal would therefore be strongly creating value for Publicis shareholders, €16 per share.”

Natixis explained why this is a “credible scenario," noting that over the last 10 months, Publicis, and Lévy in particular, have been motivated by the proposed transaction, “probably more so than Omnicom,” and only one of the regulatory approvals—China—has not been attained out of the 15 required. “It therefore seems as though the failure of the merger is the result of the two groups’ inability to agree on the decision-making structures,” Natixis said. “So it is the way the deal was arranged [as a] merger between equals that caused it to fail. And not the idea itself.

“A takeover would therefore enable Publicis to impose on its rival its management, CFO and central management, its tried-and-tested management methods—shared services—and therefore its growth model. It seems as though this is precisely the point on which the merger ran aground. While each of the two groups has a very different culture, it has to be said that Omnicom lags behind in terms of the management of its cost base. When the merger was announced in the first half of 2013, its EBITA margin was just 12.7 percent versus 15.4 percent for Publicis. This is due, in our view, partly to a much less effective strategy in terms of the management of central costs. If Publicis were to manage to impose its model, the amount of the synergies generated by the tie-up could increase strongly, by our estimates.”

Of course, the big question is how Publicis could afford to make a bid for the larger Omnicom, which has a market capitalization of $17.6 billion. Natixis assumes Publicis would need to offer a 20 percent premium, or $20.9 billion, which is more than the French holding company’s market cap of $17.6 billion. The investment bank suggests Publicis could offer shareholders 40 percent in cash and the remainder in shares. It acknowledges the ensuing debt “is high but largely bearable in view of the synergy potential and acceptable in view of the current financing terms.”

Natixis also underscored that the Badinter family—Publicis’ largest shareholders, with 9.9 percent of capital—had already agreed to allow their stake to be diluted as part of the merger with Omnicom. (Interestingly, the investment bank pointed out that Omnicom does not have a controlling shareholder the way Publicis does, which renders a reverse takeover scenario “difficult." The Badinter and Dulac families, related to Publicis founder Marcel Bleustein-Blanchet, and management in total have 18 percent of Publicis voting rights.)

Like Natixis, Wieser believes Publicis is not done in its search for greater scale. The Pivotal analyst said that for Publicis, which has twice tried to buy Interpublic, a hostile takeover of Omnicom may work better than a friendly deal with Interpublic. If that bid were ever to happen, what follows may lead to a larger chain of events, as when True North bought Bozell, Jacobs, Kenyon and Eckhardt during Publicis’ unfriendly bid.

Recalling that transaction, Wieser observed: “There is the Pac-Man defense that might follow, of Omnicom attempting to buy Interpublic, which might further limit the possibility [of a takeover].”