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 savings will be sought. DLKW’s senior management trio appear to be taking on the overall management responsibility for the merged London agency and are to 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