All companies, if they are to remain vibrant, exciting and increase their value, need to grow. A small start-up company has to grow just as a giant holding company like Omnicom or WPP does – treading water just leads to stagnation. And, of course, you need to grow without over-leveraging yourself and becoming burdened with debt. Furthermore, if you’re a publicly-listed company, you need to maintain those all-important revenue and margin targets.
With the former, it’s reasonably easy – you’re starting from a low base and you just need some new business – so significant revenue percentage growth year on year isn’t an impossible task. Global networks find it more difficult to grow organically via new business due to their already significant scale, unless they win a worldwide mega-account; but they can grow organically by making steady, strategic acquisitions (as WPP tends to do these days), or by making game-changing acquisitions – as Publicis did in February with its multibillion dollar buyout of Sapient, or Dentsu’s $5bn swoop for Aegis back in 2013.
But medium-sized companies can find growth more difficult to achieve. Without vast amounts of borrowing, large-scale acquisitions are usually out of the question, and the really big (usually global) client accounts are more likely to give their business to an established network. The medium-sized listed network can also face the dangers of a hostile takeover if their share price languishes or shareholders become antsy.
One of the mid-sized companies that faces this growth conundrum is Creston plc. The London-based mini-network was set up 15 years ago as a shell company and grew via a series of canny acquisitions in market research (MSL), DM (The real Adventure), tech PR (Nelson Bostock), advertising (DLKW – sold to Lowe in 2010), healthcare comms (Red Door and PAN), digital (TMW) and, most recently, in digital design (How Splendid, for which it paid £15.7m in April). Many of its 25 or so companies bear the 'Unlimited' branding (eg TMW Unlimited, Red Door Unlimited, Alembic Unlimited, etc), designed to emphasise the power of 'thinking without limits'.
As well as making acquisitions, it has grown by focusing on specialist areas such as healthcare and digital, acquiring a lot of new business as a result and it’s now a £75m-plus-a-year revenue company. That said, it still finds growth difficult with revenue and profit before interest and tax both only up by 3 per cent year on year – but it is growing nonetheless.
'New biz' pitches are of course an essential part of agency life, but are becoming increasingly time-consuming for the bigger accounts, and can be costly if the pitch isn’t successful, which could be a problem for a medium-sized group like Creston. But pitching for a big new account is difficult if you haven’t got the scale, and you can’t get the scale without either significant new biz wins, or costly acquisitions… it’s a classic vicious circle.
One way round this, however, is to buy a stake in another company rather than the whole thing outright – this not only creates scale without excessive leverage, but also buys new clients, expertise and influence, and of course you can always up your stake later. And this is exactly what Creston did last week.
Creston shelled out £1m (of which 50 per cent will be invested in the business) for a 27 per cent minority stake in highly-rated London creative agency 18 Feet & Rising, which has the likes of Skoda, Allianz, Nando’s and House of Fraser on its books. Not only does the deal give Creston more scale, and access to that enviable client book, it also allows all its agencies to make use of 18 Feet’s much-awarded creative team, and its expertise in above-the-line advertising (something the group hasn’t had since it disposed of DLKW five years ago).
And, backed by Creston’s resources, 18 Feet can continue the remarkable growth it has shown since it was set up in 2010 without having to borrow. Late last year the agency lost one of its biggest accounts, Nationwide, to VCCP, so it would have spent the past few months casting for something to replace the lost income; although it should be said that the business looks in pretty good shape: for the financial year ended 31 December 2014, 18 Feet & Rising grew revenue by 24 per cent to £2.7m.
The deal is being marketed as a partnership (Creston is very fond of partnerships – in the last month or so it has announced tie-ups with trends consultancy the Future Foundation; US digital healthcare specialist Propeller; and The Digital Consultancy, the last of which will see the two companies collaborating on pitching opportunities), so 18 Feet will be rebranded as 18 Feet & Rising Unlimited when it is pitching with Creston, or when it is working on shared business like Allianz.
Whilst Creston only holds a minority stake, the fact that it has more than 25 per cent will allow it to block special resolutions – things that govern changes to shareholding, sale, additional investment, etc (unless there has been a specific agreement to the contrary), so effectively Creston does have a degree of ultimate control over certain decisions, which may be uncomfortable for the majority shareholders.
However, this situation can work well for both parties; whilst Creston (may) have effectively locked in 18 Feet as part of the Creston Group as there will be a very limited market for the remaining 73 per cent given the founders may not be able to offer control to another buyer, on the other hand 18 Feet will continue to ‘feel’ like an independent, but have the comfort of a strategic investor whose interests are aligned as equity owners (unlike banks, who are only interested in getting their money back).
Everyone’s a winner? Without knowing the nitty-gritty of the deal we can’t say for sure, but it certainly looks as though both parties will benefit operationally and financially and I would like to think careful planning around this deal has meant both sides’ interests are aligned.
Tony Walford is a partner at Green Square, corporate finance advisors to the media and marketing sector