Partners at Green Square, Corporate Finance Advisors to the media and marketing sector, cast their eyes over the latest industry deals and look ahead to the next tranche of acquisitions.
The past month has been relatively quiet on the deals front – why this is, it’s hard to say - perhaps it has something to do with the accursed and unseasonably cold weather that’s been getting everyone down recently.
It’s certainly odd, because at Green Square we’ve been manically busy since the New Year, and the marketing services industry as a whole is holding up very well in a relatively uncertain environment.
Nevertheless, deals have been done – and one of the most interesting was the management buyout at The Red Brick Road (TRBR). Most Drum readers will be familiar with TRBR: it was set up in 2005 by UK ad legend Sir Frank Lowe to handle the Tesco account.
Lowe is, like Sir John Hegarty, Trevor Beattie and the late David Ogilvy and the brilliant John Webster, one of the true titans of British advertising. He first came to prominence at Collett Dickenson Pearce, the most innovative London agency of its era, and responsible for many of the most iconic ads of the “golden age” of UK advertising – Hamlet, Hovis, Heineken, Cinzano, Birds Eye and many, many others. It was also the incubator for an astonishing roster of talent – Lowe himself, Alan Parker, Charles Saatchi, Ridley Scott, Hugh Hudson and David Puttnam.
Lowe quit CDP in 1981, setting up Lowe Howard Spink, an equally innovative agency that created brilliant campaigns for Absolut, Heineken, Mercedes and Sony. LHS was acquired by the holding company Interpublic in 1990 and, after falling out with IPG management, Lowe walked out of the agency he’d founded.
After completing a two-year non-compete clause, Lowe set up TRBR. The Tesco account (which he’d worked on for years, and for whom he’d written the famous “Every little counts” strapline) followed him. For a while TRBR – named after the route Dorothy didn’t take in The Wizard of Oz – only had Tesco. But its future wasn’t hampered by this as it was recognised for having one of the biggest bits of business in the business. Before long TRBR had secured a number of other blue-chip clients – Heineken, Olympus, Sky and Magners among them.
As one of the few independent shops of significance left in London, TRBR has long been a juicy target for potential acquirers. As well as a consistently producing a high standard of work, it also has a stable management team, is well-run and has made some shrewd decisions over the years. Its 2011 merger with sister agency, digital and direct specialist Ruby was especially astute: TRBR could now offer existing and prospective clients a truly integrated service.
But there have also been hiccups along the way: last year the agency lost some of its Tesco business, and declined to re-pitch for the rest. And the loss of some key personnel (Sir Frank had departed some time before) was another blow, which led many to speculate as to the agency’s future.
Yet TRBR’s future now looks a lot more assured following last month’s buyout of the existing shareholders’ stakes by four of its management team: managing director David Miller; Ben Mitchell, the agency’s planning director; and creative directors Matt Davis and Richard Megson, all of whom joined in 2008. They each now hold a 25 per cent stake in the company and continue to operate from its office on Beak Street in London’s West End.
In a far-sighted and refreshingly unselfish decision, Paul Hammersley, the co-founder and managing partner, and David Hackworthy, the strategy partner, decided that removing themselves (and their salaries) from the agency’s books would be the best way of ensuring its future. Hammersley is now UK chief executive of EDC, the holding group that houses Dare, Elvis, brand agency Identica and PR firm Citizen Relations, and which is in its turn owned by the ambitious Canadian group Vision 7 (which also owns Cossette).
Relieved of the need to over-service the hugely dominant Tesco account (massive clients are great for revenue, but they can lead to over-reliance that can prove fatal – as with i-Level and Rapier) the new team can get on with creating good work and winning pitches.
We don’t write about MBOs very often on this blog, for the simple reason that they don’t actually happen that frequently. However, having done one myself (in acquiring design agency Michael Peters Group and brand strategists CLK, merging them to form Corporate Edge) I can confirm they are a very revealing indicator of the confidence the principals have in their business. What’s more, clients like them, because they can feel sure the people they’ve been dealing with will remain; they are also often very good for staff morale.
The biggest problem with MBOs is of course the amount of debt the buyers have to burden themselves with to complete the buyout. Back when I did mine, banks and VCs (venture capitalists) couldn’t throw enough money at me. However, given the current economic climate, the current issue is that banks are notoriously unwilling to lend against these sorts of ventures unless a lot of capital is put in. On the basis that no private equity firm is mentioned as an incoming shareholder, this deal may have been financed in part by the original shareholders exiting with the cash and reserves stored in the business. This is typical in ownership transitions where significant reserves and cash has been stored up – deals can be structured allowing shareholders to exit with some initial cash and the rest coming over time from future profits.
There are a few tax criteria that need to be met, but it is perfectly possible to achieve this and only pay 10 per cent Capital Gains Tax under Entrepreneurs Relief, hence a very attractive option for shareholders looking to depart and realise value.
In the meantime we wish the new shareholder managers of TRBR every success going forward – no doubt it will soon be on the radar of savvy acquirers.
Tony Walford is a partner at Green Square, corporate finance advisors to the media and marketing sector.
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