Bob Willott on the Bottom Line

If all goes to plan, by the end of June a majority stake in five of Chime Communications’ Bell Pottinger public relations businesses will have been sold to their management under the leadership of Lord Bell and Piers Pottinger.

The aftermath may be a little confusing for some, not least because Lord Bell and Piers Pottinger are currently chairman and vice chairman of Chime itself, and presumably will be stepping down as part of the divestment deal.  Further confusion may arise because the Bell Pottinger brand name is also attached to a number of subsidiaries that appear likely to stay under Chime Communications’ control.   Will all of the agencies carry on as if nothing has happened?   Will there be competitive conflicts between Chime owned agencies and divested agencies?   Will some names be changed, with the potential loss of goodwill that could flow from such a deed?  Or, like Messrs M&C Saatchi, will Messrs Bell and Pottinger exercise their right to include their own names in the business title with the attendant advantages and disadvantages that will flow to each of the parties?

It’s a curious situation that may become clearer when Chime puts the buyout proposal to its shareholders.  Equally interesting will be the extent to which Chime is able to retain options to buy back control of the divested subsidiaries if they are ever put up for sale, and on what terms.

While the Bell Pottinger network has been experiencing tougher trading conditions of late, that is not in itself a reason to let the businesses go without suitable safeguards and presumably Chime will have recognised this in the terms of the deal.  Under-performing agencies have a remarkable knack of recovering soon after a buyout deal has been concluded.

Bob Willott is editor of “Marketing Services Financial Intelligence”

We little Englanders may not like to admit it, but the evidence suggests that Publicis Groupe is growing faster than any of the other “Big Five” global groups.  It would have been less irritating if the company’s 12.9% growth in revenue claimed for the first quarter of 2012 had been a one-off, but that is not so.

In first quarter of 2011, Publicis recorded revenue growth of 10.7%, beaten only by a reinvigorated Interpublic.

So what may we read into this?

First, in recent years Publicis has been buying big – companies like Digitas, Razorfish and Pixelpark, to mention just three.

Secondly, the euro crisis has been a boon to Publicis because revenues earned in any other currency will yield handsome gains on translation into its deflated domestic currency.

By contrast the mighty Omnicom has had to run much faster to keep up.  Currency losses have been one of the reasons why its revenue growth has been held back.  The US group recorded a mere 5% growth in the first quarter of this year, even worse than in the first quarter of 2011.

But numbers are not always as they appear.  Publicis almost always seems to have a growth spurt in the first quarter, but by the end of the year its growth rate seems to decline.   So it may be too soon to hand out any plaudits.    Meanwhile we wait with bated breath for WPP’s first quarter’s figures.   Typically revenue growth has been in the region of 7% in the past.

Bob Willott is editor of “Marketing Services Financial Intelligence”

Ever since Chime Communications’ chairman Lord Bell disclosed that he and deputy chairman Piers Pottinger were seeking to buy out a slice of the group’s PR business, a cloud of uncertainty has hung over the group.

The announcement was first made at the end of January and shareholders deserve an update.  Three months is an unreasonable time to wait, so why the delay?

The assumption must be that a deal has not been easy to strike.

It would be entirely understandable if, at their age, Bell and Pottinger wanted to withdraw from the spotlight and hassle of running a public company while keeping their hand in at the PR business they love most. However, to do that by stripping out a slice of the company they currently run is not the most common way for a public company to handle management succession.  It smacks too much of behaving as if Chime is still their own company with which they can do what they like.

But it isn’t.  There are a lot of outside shareholders, including Fidelity Investments (11%), JP Morgan Asset Management (7%) and Aberforth Partners (6%).

And the interests of the biggest outside shareholder, WPP, cannot be easily ignored.  Indeed Sir Martin Sorrell now has the right to put two of his company’s representatives on the Chime board instead of just one.  And he made clear his opposition to any break up of Chime in an interview with The Evening Standard at the beginning of March.

However, experience shows that once the senior players in a business start to fall out, however politely, there is little to be gained by trying to glue them all together again.  The glue rarely lasts.   So pragmatism is likely to rule and some sort of accommodation will be found.

The reality is that, however, accomplished, able and well respected Lord Bell and Piers Pottinger may be, it’s a bit late in life to contemplate building another business empire.

Maybe it would suit everybody if they were to climb aboard a Pickfords removal van and transport themselves to the warmer climes of the Middle East.   There Lord Bell has some strong client connections and, if a deal can be struck that gives them some sort of equity stake in Bell Pottinger Middle East in exchange for their relatively modest holdings in Chime, the outcome might be good for everyone.

But before anyone rushes to any conclusions, this is nothing more than frivolous speculation.  That’s why an early announcement is essential.

Bob Willott is editor of “Marketing Services Financial Intelligence”.

The recent rush to acquire sport related agencies by companies like Chime and Havas ahead of the Olympic Games and 2014 World Cup may offer acquirers some attractive short term gains, but what about the longer term?

Sports and pop stars are notorious for their need to be cosseted, and their earning capacity tends to peak at a relatively early age.  Insofar as these people are an important component in generating fees for an agency, or in the marketing of events to sponsors and advertisers, the reputation of the agency, the quality of the personal contact with the stars, and the ability to replace such precious short-life assets are all critical.

But from the moment of acquisition those critical features come under threat because most sellers of agencies do so with a clear desire to exit at the earliest opportunity.  Once the earnout has been completed, the glue between the stars and their agency may begin to dissolve.  That places the onus on the acquiring group to offer the selling executives meaningful inducements to remain with the group.  Of course the management of any acquiring company will assert that it is well aware of this need and that the earnout period also allows enough time to develop other relationships with sporting personalities.

All of that may be true.  However, the validity of the management’s assertions will not become clear until after the earnout has been concluded – by which time we shall all have forgotten the Olympics and the one-off marketing opportunities it is providing.

Not all sports marketing relies on the close involvement of sports stars.  Some agencies have developed expertise in marketing the sporting events, and winning sponsorship for them, almost irrespective of the starring participants.  That type of business may be less vulnerable to the temperament of short-lived stars.  So it’s important for investors to look carefully at how sports agencies’ profits are being made.

A decade or more has passed since people learned that the word “digital” did not of itself guarantee super profits.   It’s just possible that a similar lesson has yet to be learned about the words “sports marketing”.

Bob Willott is editor of “Marketing Services Financial Intelligence”

It’s not very often in these gloomy times that there’s something to celebrate, but the good results announced by The Mission Marketing Group this week justify at least a modest cheer.

Post-tax profits reached £3.1 million in 2011, up from £0.9 million in the previous year. Before that there was a thumping great loss (see chart).

Chairman David Morgan clearly has a shrewd head on his shoulders and probably quite a stubborn streak too, although he could never have expected to be doing his current job when he sold Bray Leino to Mission in 2006.

His original success story was in the founding of Bray Leino in 1978.  Since then he has sold that company three times in succession – an unusual feat in itself – having bought it back again on two occasions so far.  The full story was recounted in special report published by Marketing Services Financial Intelligence.

At Mission, instead of buying Bray Leino back, Morgan has emerged as chairman after the acquiring group hit trouble in 2009.

Now well into his sixties, Morgan seems to lack none of the energy required for the task and clearly he brings lots of experience.  He has built on specialisms within the group as well as acquiring Newcastle agency Robson Brown from the administrators in December 2010.  Given his track record, he also appears to understand what brings clients to an agency and how to use good staff well.

While Mission’s profits have yet to recover to their previous peak of £5.2 million in 2008, Morgan seems well on the way to achieving that.  Along the way he could probably teach some of his peers a thing or two about running a marketing agency as well.

Bob Willott is editor of “Marketing Services Financial Intelligence”.

One message to emerge from the otherwise pleasing results of M&C Saatchi for 2011 is that the management of overseas businesses doesn’t get any easier.

Despite its ambitious global aspirations, the UK remains the backbone of the M&C Saatchi business, generating 44% of group revenue. More importantly, the domestic market contributed nearly 58% of the group’s operating profit.

Adventures into perceived growth markets such as China and Australasia have been fraught with difficulties that include significant client losses. 

In Australia, a 20% slice of local equity was sold back to its founding entrepreneurs Tom Dery and Tom McFarlane in 2007 with an option to double their stakes if certain performance targets were achieved.  Desirable as that deal may have been, it has not yet generated the profit growth that either its local management or the group’s shareholders must have hoped for.

Making any kind of profit in the United States has been a challenge, so hopes are now being placed on the appointment of a new chief executive Jeff Brooks.

The brightest signs of success came from South Africa, where the Cape Town and Johannesburg offices are now said to be in profit, and Continental where Germany, Italy and Switzerland all performed well.  But even that success has been a long time coming.

There is no magical solution to the successful management of overseas operations, but good and committed local managers are clearly key.

Bob Willott is editor of “Marketing Services Financial Intelligence”.

Reports that Dentsu plans to rebrand its western advertising agencies under the McGarry Bowen umbrella prompt some reflections on why this may have come about.

Dominant in Japan and the Far East, each attempt Dentsu has made so far to build a bridgehead in Europe has been disappointing at best.  And the profit it earns from western territories has remained pitifully small.

Having bought CDP and then Travis Sully in the UK, neither generated much momentum and the retreat to the Dentsu name in London simply recognised reality: most of its business came from Japanese clients.

The most promising initiative was probably the alliance with Leo Burnett’s US holding company BCom3 in 2001.  Given time for the cultures to blend, that link-up could have matured into a more comprehensive merger and provided a formidable global force.  But in true buccaneering style, Maurice Levy intervened in 2002, acquiring BCom3 for Publicis and leaving Dentsu with nothing more than a shareholding in the French group, some non-compete understandings and vague talk about future collaboration.

Dentsu had lost the initiative and must have been left wondering how best to build a sizeable business outside its home territory.   So the decision to cast off the chains that bound it to Publicis may prove to be quite a blessing.  Dentsu is again free to develop its western business in the manner it believes to be best and has some additional cash with which to do it.

McGarry Bowen is an expansive US based agency that was acquired by Dentsu in 2008 with a strong client list and the need for an international network.  Re-branding the UK and Dusseldorf offices will provide a start, and the McGarry Bowen name and reputation will be immediately more appealing to western clients with international needs.  Let’s hope that, this time, Dentsu has got the formula right.  Certainly it feels right, which is more than can be said for some the previous initiatives.

Bob Willott is editor of “Marketing Services Financial Intelligence”

With a track record of losses like those shown in the chart below, one might expect the management of Canada’s MDC Partners to simply throw in the towel and admit defeat.   At the very least one would be expecting more uproar from shareholders and some pretty tough talking with banks.

But yesterday’s announcement of the financial results for 2011 was accompanied by the usual positive outpourings from chairman and chief executive Miles Nadal:  “2011 was another solid year of growth” he reported, adding that “37% revenue growth…as well as meaningful market share gains are proof that our partner companies continue to execute well.”  Probably the only execution that has been missing – apart from the delivery of profit – is that of the management team.

“We are confident that our investments will pay off and that we will deliver market leading organic revenue results and a meaningful improvement in margins and profitability in 2012 and beyond”, Nadal assured his public.  The only trouble is that he has been making reassuring noises like these for so long now that they must be having less and less impact on his poor investors.

In such circumstances it is astonishing that the share price had been climbing upwards almost continually since December 2009 until it peaked in August 2011 and began to slide gently downhill.

Agencies like Crispin Porter & Bogusky that were bought by MDC a few years back deserve better from their new owner.  But whether Anomaly was such a wise purchase last year remains to be seen.

Bob Willott is editor “Marketing Services Financial Intelligence”

We may be looking forward to spring, but in economic terms we are still in the depths of winter.  Weak companies, made more vulnerable by the cold winds of recession, have been eager to find warmer homes.

Nowhere better has this been illustrated than at the former Media Square subsidiary Fourninety that moved into literally warmer climes in the shape of Indian group Basil last week.  And the gloomy trading climate that surrounded the Cello subsidiary Farm appears to have prompted the transfer of people and clients to enjoy the hotter prosperity of Inferno.

These deals are just two of many that must be going on quietly throughout the marketing industry.  Often they tend to happen towards the end of a recession, because that’s when the money starts to run out and also when potential buyers regain enough confidence to take a few risks.

There’s no evidence to suggest that either Fourninety or Farm were in dire financial straits as both were previously owned by public companies.  But they certainly were not prospering and a change of climate may be all that is required to restore them to better health.

Talking of taking risks, Publicis must have viewed Pixelpark as an opportunity not to be missed while it continues its drive to emerge from the recession as the most digitally savvy global group.  Pixelpark had been losing money.  Publicis had cash to spare (before buying back most of Dentsu’s shares, that was) and was prepared to part with €30 million to gain support for its bid.

A change of climate might also help a number of other high profile sickies like WFCA, Adventis Group and Asia Digital Holdings, not to mention the many privately owned agencies whose owners play their financial cards closer to their chests.  Almost certainly there will be more casualties to follow those like Brilliant Media Group, rescued from administrators by Mediacom.

All that one can hope is that the weaker agencies are able to conserve their financial fuel until better climes return or to find shelter with someone else until the worst of the economic winter has passed.

Bob Willott is editor of “Marketing Services Financial Intelligence”

It’s almost irritating to see how Omnicom Group manages to report consistently steady growth in profits.

Seemingly unperturbed by being overtaken by WPP in the revenue league, Omnicom continues to deliver a reliably solid return to its shareholders.   And that, of course, is what keeps investment institutions happy.  While there is room in any portfolio for a few fast growth and/or speculative shares, the most critical component is a bedrock of solid and consistently performing ones.

In the UK, only WPP is sufficiently large to have any chance of earning a similar accolade from institutional investors.  That probably explains why the marcoms sector has such a bad name among some institutions.  A quick look at how marcoms shares have performed on the UK stock market over recent months illustrates the point only too well.   There just are not any other seriously big players.

Some, like Huntsworth, may get there eventually, but none seem to have mastered Omnicom’s art of delivering consistently solid profit growth year in year out.   There’s a lesson there.

Bob Willott is editor of “Marketing Services Financial Intelligence”