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Analysis: Why has M&C spent £6m on Lean Mean Fighting Machine?

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By Barry Dudley, Partner

May 2, 2014 | 6 min read

My word, people have been busy this week. It seems that the Easter break has re-energised the M&A teams of many a major marcomms operator, and over the past eight or nine days there has been a flurry of activity in all sorts of spaces.

Edinburgh’s Cello Group, St Ives, Kantar and Porta all concluded deals during the period, but yesterday (Thursday 1 May) was the big one – when over half a billion pounds’ worth of deals were concluded.

First off, M&C Saatchi bought out London indie Lean Mean Fighting Machine (LMFM).

It is understood that M&C Saatchi paid over £6m to seal the deal. Established medium-sized independents like LMFM (founded in 2004, employing over 40 people and a claimed 2013 revenue of £3.1m) are in increasingly short supply these days. As scarcity of this kind of agency rises in the coming years, the premiums acquirers may pay could rise still further.

It’s an important acquisition for M&C, which as a stock market-listed “federation of entrepreneurs, built through start-ups and owner managers”, needs to gain scale if it is not to be a takeover target itself. The UK arm of the global group hasn’t made any major acquisitions since taking a 60 per cent stake in the talent management agency Merlin last January.

By all accounts, the deal has been hard-won: M&C entered negotiations for LMFM (whose client book includes De Beers and Unilever) 12 months ago. The £6m sum will be split between LMFM’s four founders – techie Dave Cox, creative Dave Bedwood, managing partner Tom Bazeley and second creative lead Sam Ball – and although there is no earn-out based on future performance, I do understand that an incentive scheme is in place.

There being no earn out is a point to perhaps dwell upon. Taking the numbers at face value, a £6m price tag for a £3.1m revenue business might appear expensive – around two times revenue and if we assume that the business was making an operating margin of, say, 20 per cent, this implies an operating profit of £0.6m which gives a profit multiple of 10 to get to the £6m valuation. Heady stuff.

But, this acquisition appears to really be about bringing in talent, clients and more scale to the core of M&C, merging this talent on day one, with the LMFM brand name falling away. With the business subsumed there is no way of tracking its performance for an earn-out so a bigger price is paid day one to allow for there being no earn-out incentive. Top this up with what I suspect will be a bonus-based incentive scheme, perhaps with the ability to earn M&C stock options, and you have a pretty compelling deal.

The LMFM team are to work across group business – M&C’s UK business includes DM and digital agency Lida, a stake in Walker Media, Talk PR, and social monitoring agency Human Digital – and it already shares the prestigious Land Rover account with Lida, so there are already neat synergies between acquirer and acquired. Best of all, LMFM has a pretty decent record in, and reputation for, quality creative, so M&C’s own creative reputation should be further bolstered by the buyout.

M&C’s UK boss Lisa Thomas said yesterday in a statement: "LMFM’s sense of adventure and innovation perfectly complement M&C Saatchi’s entrepreneurial spirit. Likewise, their industry-defining skills across all digital channels will augment our extensive digital capabilities, allowing us to unlock more creative opportunities for our clients."

A deal of a slightly bigger scale was also announced yesterday. Much to everyone’s surprise, MTV owner Viacom made a swoop for Richard Desmond’s Channel 5 for £450m. This appeared to come from under the noses of favourites Discovery and BSkyB. First of all, this represents a fantastic profit for Desmond, who bought Channel 5 from RTL less than four years ago for just £103.5m.

Since 2010, Desmond has turned Channel 5 from a loss-maker into a highly profitable channel that brings in over £350m a year in advertising and generated £26m in profit last year (and which is expected to bring in £70m this year). Although the amount paid is some way short of the £700m Desmond said he wanted, a £340m-plus profit in four years isn’t at all bad.

Arguably it’s an even better deal for Viacom, which gets its hands on something very rare and very precious – a UK free-to-air channel (there are only three of these which take advertising, and two of them don’t look like being sold any time soon); and a prestigious addition to its other properties, which include MTV, Nickleodeon, Comedy Central and the famous movie studio Paramount.

Channel 5 is best known for a number of highly profitable UK brands, including Big Brother, The Gadget Show and kids’ TV strand Milkshake!, as well as its US imports such as CSI and House. Viacom’s own productions – dramas, comedies, kids’ programming and reality shows – should fit in perfectly with Channel 5’s existing programming.

It’s perhaps too early to know what this deal means more broadly, but rivals ITV, Channel 4 and BSkyB will all be worried (Sky also provided advertising services – we shall see what happens there) but I think it’ll be a good deal for UK viewers and advertisers: more investment, more and better shows, a wider portfolio of channels and a more technically advanced offer. Channel 5 doesn’t yet broadcast in HD and its catch-up service, Demand5, leaves a lot to be desired.

Barry Dudley is a partner at Green Square, corporate finance advisors to the media and marketing sector.

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