August 29, 2013 9:15 am

WPP weighs options as bigger rival emerges

Sir Martin Sorrell has made his views clear.

In the wake of the agreed merger between Publicis and Omnicom, which will create the world’s largest advertising group by revenues, the highly acquisitive chief executive of WPP has said he has no intention of following suit.

Instead the marketing services company, which reported first-half results on Thursday, will look to pick off clients of the enlarged group who may be worried about potential conflicts of interest due to their rivals also being represented by Publicis Omnicom.

The most obvious areas for this lie in consumer beverages – Publicis Omnicom will look after both Pepsi and Coca-Cola – and in telecoms, with the merged outfit serving AT&T, Sprint, T-Mobile and Verizon.

Sir Martin has also kept busy with smaller deals. Since the Publicis Omnicom merger was first announced, WPP has snapped up 10 agencies in the US, Europe, Latin America and Asia including Benenson Strategy Group, the consultancy that ran the research and polling operations for US President Barack Obama’s election campaigns.

This march will continue as WPP seeks to expand its reach into the faster growing sectors of digital and emerging markets. The advertising group has raised its revenue targets for both fast-growth markets and new media to at least 40-45 per cent over the next five years, from current targets of 35-40 per cent.

Even so, some analysts and investors speculate that, despite Sir Martin’s dismissal of the need for a big mergers and acquisitions deal, WPP could look to acquire Paris-based rival Havas, or Interpublic Group of the US, one of the big four advertising holding companies.

Brian Wieser, analyst at Pivotal Research Group, says it “seems inevitable” that there will be more consolidation among the big advertising groups.

Analysts and ad executives believe Sir Martin’s fierce rivalry with John Wren and Maurice Lévy, the respective chief executives of Omnicom and Publicis, provides another strong motivation for WPP – which will lose its crown as the world’s biggest ad group after the Publicis Omnicom merger completes – to pursue a sizeable deal.

A deal with Havas, the sixth-largest marketing services group, would give WPP scale in the fast-growing Mexican market, and narrow the gap with its newly merged rival. But it would also significantly increase WPP’s presence in France and Spain, two of the more troubled global advertising markets and potentially create competition concerns in these countries.

“It would be easier to go after their clients than the business,” says a senior advertising executive at a rival group.

WPP is interested in parts of Interpublic, according to people close to the company. Following the Publicis Omnicom announcement, an area of concern for WPP, according to people inside the company, is the scale the newly merged company will achieve in media buying in the US.

A tie-up between Interpublic’s Magna arm and WPP’s GroupM, the world’s largest media buyer, would be one way of beefing up its media-buying operations in the US, where scale can help achieve better ad rates for clients. But Sir Martin dismissed any such tie-up on Thursday.

There are also drawbacks to any deal with Interpublic. The US ad group is currently trading on a relatively racy forward price to earnings ratio of more than 16 times, as its share price has climbed in the wake of increased M&A speculation. This is despite Interpublic having the lowest organic revenue growth of the main ad groups since 2006, according to calculations from Clarity, a boutique investment bank.

With the exception of media buying, many also question whether bigger is better for clients, given the concerns about client conflicts.

“Time will tell where the tipping point is in getting the benefits of scale versus the client-conflict side,” says Ben Tolley, partner at Clarity, a boutique investment bank.

A deal with Interpublic, however, is the only one that will catapult WPP back into the number one slot in terms of size.

One media analyst asks: “Do people underestimate how much Martin Sorrell cares about being number one?”

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