What happened to CCG?

What began with a roar in the ad industry is now merely a whimper: Bates, the acquisition that once stunned Madison Avenue and ultimately set off the downfall of the Saatchi brothers, faces a difficult existence as a medium-size independent with a costly global infrastructure and few worldwide clients to sustain it.

More than five years after the demerger of Cordiant plc, the fate of Bates’ parent, Cordiant Communications Group, stands in sharp contrast to one-time corporate sibling Saatchi & Saatchi. Saatchi is enjoying a resurgence in creative reputation and new business, with worldwide billings rising 20 percent last year to an estimated $7.9 billion. CCG, meanwhile, is scrambling to avoid default on its loan covenants as it again renegotiates debt, and is seeking to raise capital by selling off assets in a fire-sale atmosphere. In talks to sell three of its businesses—Australian shop George Patterson Bates, PR firm Financial Dynamics and its stake in German agency network Scholz & Friends—CCG is aiming to retreat to its core business, Bates.

Post-demerger, Saatchi arguably went forward with greater advantages. It was blessed with bigger, global clients, such as Procter & Gamble and Toyota, and the agency still enjoyed a strong creative reputation in many parts of the world. At the time, CCG took a glass-half-full view of its situation, saying only 13 percent of its revenue came from global clients, giving it room to grow. (Few multinational marketers rushed in to fill that gap.) Given that discrepancy, it was reckoned that CCG would be the first of the two to seek the security of a holding company to help develop the resources CCG needed to compete in a consolidated industry.

That never happened, but not for lack of trying on the part of CCG’s management, led by former CEO Michael Bungey. Amid the dot-com euphoria of 2000, Bungey set out on his own diversification plan—which was also devised to make CCG more attractive to suitors—piling on debt to buy pricey marketing-services companies such as Lighthouse, purchased that year for $421 million. Now, CCG is reduced to selling Lighthouse’s major components, which include Financial Dynamics. The PR unit is expected to be sold back to management for $32-39 million.

As the economy hit the skids, Bates lost some of its biggest clients, such as Hyundai and Wendy’s. Lighthouse’s value was written down; bank loans were renegotiated. The current round of talks involves CCG’s 13 banks, led by HSBC.

By Dec. 31, CCG had debt of $397 million compared to its market capitalization of $180 million. CCG is now trading at about 27 pence on the London Stock Exchange. (More bleak testimony of the fate of the two former corporate siblings: When Saatchi and CCG demerged in late 1997, they each traded in London at £1.10 a share; in 2000, Saatchi was sold to Publicis for £5 a share.)

Perhaps time and the industry’s changing environment was against CCG from the start. Without striking an acquisition deal, the company needed to continue to grow, picking through what was left of marketing-service independents not already scooped up by other holding companies and paying market rates at the top of the cycle.

“In hindsight, it’s easy to say they overpaid, but in 2000, everyone was overpaying,” said Tom Deitz, an analyst at Merrill Lynch in London. “CCG’s options were pretty much to be bought or find new ways to grow. So it seemed at the time right for them to diversify, but acquisitions like Lighthouse proved to be too difficult for the group and may not have been of high-enough quality.” —NOREEN O’LEARY