Road Report: Getting the right exit

Only a few months ago, AIM-listed groups were thundering across the landscape, snapping up creative agencies as they looked to feed their hunger for growth... But that was before the clouds of recession rolled in. Now what hope do agency owners have of fi

Starting off around Glasgow’s M8, then, we have reports that two agency MBO’s – including one at Frame - have been the subject of delays.

Another delay near the M62 as The Direct Marketing Group puts its planned floatation on hold. But the region also saw a major crash as Poulters is closed – with what at best can only be described as a half hearted approach to put it on the market.

More drama in the City as the shareprice of the big marketing buying groups – the likes of Cello, Mission and Hasgrove fall.

In fact jitters have reached such an extent that speculation has surfaced that Cello may stop looking for businesses to acquire and start looking for somebody to buy them out.

There is no doubt that the atmosphere for acquistion has changed. But has any management team – perhaps looking for the highways and byways of retirement – completely missed their exit.

Kevin Steeds, executive chairman of Cello Group believes not. In fact, contrary to the rumours of a sale, his company is actually looking to continue its acquisition strategy over the coming months. However, he does expect to see a slow down in agency purchases over the next 12 to 18 months and says it was inevitable given that in the last four years, as many as 20 publicly-listed marketing groups – like Cello – have emerged.

Gone south

“There has been a lot of activity over the last two or three years in particular,” says Steeds. “Against that backdrop conditions have changed and all of those companies have borrowed money from banks. The vast majority of their share prices have ‘gone south’ over the last six to nine months since last September and a lot of those public companies have publicly stated that they are not going to acquire any businesses for the time being. Meanwhile, others sit there thinking ‘is now the right time?’ and there is much more caution around.”

Rose Lewis, a partner at Pembridge Partners – who provide financial advice for creative companies – is expecting that caution to lead to a drop in prices for agencies being sold.

“If you look at the last market slump, acquisitions slowed right down. Sellers felt that it wasn’t a good time to sell, although companies might be able to pick up a bargain if it was driven by some other reason to sell, but most people will probably batten down the hatches and wait for a better time to sell.”

However, while Iain Ferguson, CEO of The Mission Group, is confident that his company can continue to make acquisitions, he is sceptical about any bargains that could emerge from the current economic crisis.

“The chances of buying a good, successful and well performing company on the cheap are low, so the smart people will be looking beyond the sticker price and looking at the real quality on the market. Great companies will always have value and we would always be nervous about getting something from nothing.”

Another creative business expert is Tony Walford, senior consultant at Results International, who believes the real problem for any company acquisition or MBO is persuading the banks to part with their money.

Lower Value

“In marketing services what matters is the people. If you run a big property company, you can borrow against the buildings to go and buy another company,” explains Walford. “When you’re borrowing against a cash flow business to buy another one, there’s not a total reluctance to lend, but getting money to do deals is harder.

“Also, if you are thinking of going through an MBO then it’s a good time to buy – you’ll not pay as much money as you would have a year or two ago. But the current management might not want to part with their shares at a lower value, so this can create a problem.”

So the bottom line seems to be that if you are either looking to buy or sell it still might be possible to get to your destination. But with the clouds of economic gloom gathering beware of surface water, and remember to use your dipped beam and windscreen wipers.

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