Creston suffers book loss on DLKW sale to slash borrowings

As anticipated here last Friday, the publicly listed marketing group Creston has agreed to incur a loss on selling its above the line advertising agency DLKW to Lowe Group, a subsidiary of The Interpublic Group of Companies. The deal is subject to shareholder approval.

The deal involves a rather generous cash payment of £28 million for companies that cost Creston about £34 million to acquire (see Rumoured sale of DLKW could be at a financial loss for Creston). So, on the face of it, Creston has lost about £6 million on its investment.

However, Creston said today that it will incur a one-off hit of only £3.2 million in its accounts to reflect the loss on sale, implying that Lowe will not be paying for any of DLKW’s net assets other than goodwill and similar intangibles. But in the small print of Creston’s announcement it acknowledged there will be a further write-off in respect of those other net assets when the deal is completed. In other words the loss will indeed be more than £3.2 million.

Indications are that Creston has been driven by a desire to strengthen its over-stretched balance sheet after running up substantial borrowings to meet earn-out obligations on past acquisitions (see Marketing Services Financial Intelligence: August 2008).

At 31 March, Creston’s short-term liabilities exceeded readily realisable assets by £28 million and net bank borrowings had reached £25 million. After the DLKW sale, Creston’s bankers will reduce its overall borrowing facility from £40 million to between £9 million and £25 million, depending on how much of the DLKW sale proceeds are reinvested in other acquisitions within six months.

The acquisition of DLKW will require Interpublic to part with a sizeable amount of cash after a series of financial embarrassments over recent years prompted it to conserve resources. However, its balance sheet is now much improved and an outlay of £28 million is unlikely to put too much pressure on it.

Few details have been announced yet about how DLKW will be integrated with the Lowe London agency beyond being renamed DLKW Lowe, but inevitably some cost savingswill be sought. DLKW’s senior management trio appear to be taking on the overall management responsibility for the merged London agency and areto have a minority investment in it.

As reported here last Friday, the DLKW group of companies (including DLKW Dialogue and The Composing Room) made a profit after tax of about £1.9 million in the year to 31 March 2010 – almost the same annual rate of post-tax profit as achieved when the companies were acquired. Turnover and operating profits showed a small decline from 2009.

Creston reported a post-tax profit for the entire group of £5.1 million for the year to 31 March, down 22% on the previous year on almost unchanged turnover. The profit was hit by a £3.8 million write-off on the closure of CML Research, but benefitted from a £1.4 million reduction in interest charges.

Creston’s share price continued its upward path this morning, opening at 100.5p from a low of 24p in December 2008. In their heyday of December 2006, the shares stood at 202.5p.

© Fintellect Ltd

  • Barrie Brien

    I would like to correct the inaccurate reporting of Mr Willott.

    Creston did not sell DLKW to “slash borrowings” and I am not sure how he has jumped to that erroneous conclusion.

    Following a very resilient performance by the group companies (only a 4% decline in revenue versus an industry average of 7% to 12%), Creston had already “slashed” its debt by £16 million.

    Mr Willott states that Creston has been “driven by a desire to strengthen its over stretched balance sheet after running up substantial borrowings”. This could not be further from the truth. Our balance sheet and borrowings have always been well within banking covenants. As at the year end we reported a very comfortable debt to EBITDA multiple of 1.6 times and this is against a banking covenant of 2.5 times. In addition to this, per our May management accounts we have £11 million drawn against our £25 million banking facility, i.e. £14 million of extra facility if needed.

    The reason for selling DLKW, as explained in our announcement today, has been driven by our desire to focus on the part of the marketing mix that will grow faster and in our view that is not traditional advertising. As everyone knows, advertising has been under enormous pressure (forecast to decline by 22% from 2007 to 2010) and it will continue to be so, as technology and the internet drive a structural shift in how consumers spend their time and money.

    The result of the transaction is that Creston will be in net cash, which is obviously a beneficial consequence but it was not the reason for the transaction. We are now out of a business and a part of the industry that has been in decline and we have exited at a multiple of 9 times the 2010 operating profit of £3.1 million. DLKW has been a great company to be associated with and it has made substantial cash flow for the group over the 5 years ownership. Between this cash flow and the £28 million to be paid by IPG, we have generated more cash than we paid for the company. However, times have changed in the industry. Our remaining operating companies have very exciting times ahead of them and following the disposal we have even more facility to invest behind their future growth.

    We feel this has been a complete win win for our clients, our companies and our shareholders, and as and when our shareholders vote in favour of the proposed disposal, I will wish DLKW the very best.

    Barrie Brien
    COO & CFO Creston plc

  • Bob Willott

    So Creston would not regard its balance sheet as being over-stretched when it owed £28 million more in short term liabilities than it had in readily realisable assets like cash and debtors? I don’t think I implied that Creston had exceeded its banking covenants in any way and if its bankers were happy for a customer to run up wopping net current liabilities, so be it. But it doesn’t alter the facts.
    And I’m expected to believe that selling something for less than you paid for it is a sign of healthy stewardship too?
    Hmm…clearly I must apologise for arriving at these “erroneous conclusions”, doubtless based on textbooks that no longer have any relevance and on a total lack of experience of real business.
    Having said all that, I would not doubt for one moment that a number of legitimate strategic arguments contributed to the decision to sell.

  • Barrie Brien

    Fortunately our long standing bankers review all of our financial statements, rather than just one number, to come to their conclusions. Net current liabilities is in no doubt a very important number and must be monitored very carefully but in conjunction with cash flow, net assets and available unused banking facility.

    As to stewardship, it will be up to the shareholders to decide if, generating substantially more cash than the amount paid for the company and then extraditing ourselves from the declining part of the marketing mix, is good stewardship.