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.
While a busy year overall, 2015 was a fairly quiet one in terms of big pure-marcomms M&A activity, for obvious reasons – there aren’t that many large independent properties for the big groups to snap up; most of them have been bought!
With Publicis’ multi-billion-dollar purchase last February of the Sapient group, there are virtually no independent shops of scale left to buy.
In any case, since the failed Omnicom-Publicis merger, huge deals – Sapient aside – seem to be off the big holding groups’ radar systems. WPP, for example, prefers to stick with its thus far successful strategy of making sustainable acquisitions or investments in fast-growing markets and in territories ripe for growth. Mega buys don’t seem to fit in with Sir Martin Sorrell’s thinking these days.
Even those tech-rich behemoths, Amazon, Apple, Facebook and Google, had a relatively quiet year.
So what can we expect to see in 2016?
In 'straight' marcomms, more of the same I think. Here in the UK, there are very few large indies left. Karmarama and Mother spring to mind as independent shops of decent size and reputation.
But I think that – unless a premium offer is made – these will still be independent come the end of 2016. Part of their reputational equity lies in their independence and it would have to be an acquirer that brought something really different to the party in terms of their future development that would turn their heads. The same applies to the big US indies such as Wieden+Kennedy and Horizon.
I can see WPP, Publicis, Omnicom, Dentsu Aegis and Havas continuing to pick up small and specialist creative, digital and data shops, but they have to lower their bar in terms of acquisition criteria.
Aside from the usual requirements around client concentration, growth opportunities, stability etc, many won’t look at an agency with less than £1m EBIT [earnings before interest and taxes]. But given there are few UK independents of that size left, that criteria has to be removed.
Otherwise they will have to remain focused overseas where that criteria seems not to apply. Many of the deals done in growing markets have been well below this level, but this has largely been about getting into those territories and at low risk.
We will also see a lot more activity in the UK regions in 2016 than historically. With London no longer being an affordable place to live and work – even commuting in from the suburbs is cost prohibitive for new and young talent – many grads are staying put and joining agencies in regional cities… and those agencies are becoming highly profitable centres of true excellence.
While London will always be important to acquirers, I believe the big firms will expand out to the regions more this year, partly driven by the lower cost base, with Accenture and HP being recent examples. Accenture has 600-plus people in Newcastle and other tech providers such as HP are investing heavily in that region, and the global management consultancies will continue to acquire in digital.
I strongly believe overseas demand will continue to be strong for UK agencies. Whilst there is a lot of turmoil in the markets as I write – the oil price is collapsing, China stock market falls are reverberating, there is significant unrest in the Middle-East and notwithstanding George Osborne’s recent warnings – the UK economy is in relatively solid shape compared to much of Europe. I believe investors will see it as a relatively safe haven, much as they have on the London property side.
One interesting prospect, however, is Interpublic Group (IPG), which, among other things, moved to a new New York headquarters.
Some observers still have IPG marked down as ripe for a takeover by one of its holding group rivals, after a few relatively quiet years it had a pretty active 2015. IPG is generally not as acquisitive as many of its peers but last year it made a number of international acquisitions – Hugo & Cat in the UK, ADV in Russia, Magic in China, Media Experts in Canada to name a few, plus start up investment via R/GA.
It would seem that IPG may be turning a bit of a corner, with revenue growth in the first three quarters of 2015 outpacing Omnicom and it is home to some great brands, such as McCann, Futurebrand, RGA and Weber Shandwick. And there’s the rub – is the sum worth less than its parts?
I could see an ambitious private equity or venture capital group making a bid (at the moment shares are fairly buoyant, although nowhere near its peak value), breaking up the group and selling off its assets to extract maximum value. One could see a Publicis paying handsomely for RGA, or Dentsu for The Martin Agency. It has a number of sports marketing agencies, which WPP, or Chime and its new private equity backers Providence, could find tempting.
Should someone make the right offer, I can see stockholders cashing in. Much depends on how next month’s results announcement pans out, but we may see some significant movement around IPG in 2016.
Another group that would be worth more if it were broken up or parts spun off is Yahoo, which I wrote about in The Drum recently. If Yahoo’s management are to get maximum value for shareholders, they will need to act quickly because the legacy side of the business is losing value all the time. So again, Yahoo may be a very different entity come year end.
Another likely target for takeover or breakup is that 'old media' stalwart Time Warner. The company has been in the news recently: for a massive data hack in the US, in which millions of cable customers’ passwords may have been stolen; for giving CEO Jeff Bewkes a new three-year contract; and, most relevant here, for all manner of rumours about the company’s future.
Readers with good memories may recall that a couple of years ago Rupert Murdoch came very close to buying the company, which would have been the crowning glory of his long, glittering and controversial career.
Rumours have been floating round Wall Street the past couple of days that the old operator is ready to swoop again. This coincides with the news that a large number of Time Warner stockholders are getting fed up and would like to see a breakup (leading, inevitably, to a spike in the Time Warner share price this week), or sale.
Back in July 2014 Murdoch offered $85 a share, and the company’s stock finished 2015 at about 13 per cent below that. Time Warner has a large number of activist stockholders with long memories and who may be getting ready to force the board’s hand. One part of the TW (sadly that’s Time Warner, not Tony Walford) empire that is hot is HBO – it could unlock a lot of value if it were spun off, and Murdoch could be interested, as streaming is an area his 21st Century Fox entertainment conglomerate is weak in (although it has a stake in Hulu, the streaming service available in the US and Japan).
And no media mogul can afford to not be in streaming – it seems to be the future, both here and in the rest of the world. Over 100 million people in the US are now accessing streaming subscription services such as Netflix, Amazon and HBO Now, while cable subscriptions are tanking. The same is true over here, with Netflix, Amazon Prime and the free BBC iPlayer proving very popular with viewers.
And here I’m going to stick my neck out and make a prediction that might seem a bit crazy at first, but might well have legs: could Murdoch sell his stake in Sky this year? The past few years have been all about Murdoch and Fox getting the bit of Sky they don’t own. But now the reverse might happen – he might seek to offload his 40 per cent stake.
Sky TV is hugely successful of course – it’s the UK’s biggest broadcaster, bigger even than the BBC. But I wonder how much further it can grow (with 11 million subscribers, it’s probably nearing saturation point), and it looks to be vulnerable due to its over-reliance on sports pay TV. While Sky’s technical offering is excellent and on the cutting edge, there’s something rather old-fashioned about its business model as people move to streaming. At least Virgin has its own significantly fast fibre optic network to rely on as TV subscriptions decline. Sky is piggybacking on BT’s fibre infrastructure.
Today’s viewer wants flexibility, and Sky doesn’t offer that. When you buy a package, you get a whole load of channels you might not want, and it looks expensive, particularly when compared to £79 a year for Amazon Prime or £7.49 per month for Netflix. Sky’s tariffs are complex, while the propositions of its rivals are simple to understand.
Sky does have two streaming-style services, Now TV and Sky Go, but again their offer is quite complex and the technical quality and content offer aren’t quite up to that of their rivals plus, programming-wise, Sky’s dominance in football is looking more and more shaky as BT grows in power and confidence.
Buying Time Warner (or just HBO) would give Murdoch and Fox access to a well-regarded streaming service and a vast library of content. Selling off the Sky stake would free up valuable cash and would placate nervy regulators.
After the US, Britain is the most dynamic and important TV territory in the western world, and there would be no shortage of big North American or other broadcasters (Disney, NBC Universal, A+E Networks) willing to pay a premium for such a blue-chip company.
When looking at the £450m Viacom paid for Channel 5, it doesn’t sound quite so crazy now, does it?
Tony Walford is a partner at Green Square, corporate finance advisors to the media and marketing sector
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