WPP ready to cut thousands from workforce as revenues expected to decline, CEO says

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Media giant WPP is prepared to make thousands of job cuts this year in order to counter declining revenues, its chief executive Martin Sorrell told dealReporter. He said that WPP will cut a percentage point of the 112,000 global headcount for every percentage fall in revenue as the deeper effects of the global credit crunch are felt on the group.

Sorrell said: “We would make cuts in line with revenues. If revenues are down 2% we will make a cut in 2% of the workforce. If it is down 3 or 4% we will reduce headcount by 3 or 4%.” Previously Sorrell said the group had a target of 2,000 job cuts for the year.

Alex Griffiths, a credit analyst at Fitch, said that WPP was likely to cut as much as a tenth of the workforce in order to deleverage its position. “In 2002 WPP reduced its headcount by almost 10%. This time round they could do that again.”

Yesterday credit rating agency Standard & Poor’s revised its outlook on WPP from stable to negative on concerns and short term rating s from ‘A-30’ to ‘A-2’ over deteriorating market conditions. In a statement the agency said: “The outlook revision reflects our view that the significant deterioration of economic and advertising conditions worldwide may lead to significantly slower-than-expected deleveraging at WPP, and even to increased leverage in the short term. Cooke said WPP’s ratio of adjusted average debt to EBITDA is likely to exceed 3.5x by the end of 2009.

S&P said WPP has budgeted for 2% negative organic decline this year. “However, developed advertising markets are generally expected to fall significantly this year, and growth in emerging markets is also faltering. It is in our view therefore likely that WPP will suffer a greater revenue decline, on an organic basis, than it has budgeted,” said S&P.

Last week credit rating agency Moody’s changed its rating for WPP from stable to negative. In a statement Moody’s said the change reflected “expectation that key debt protection measurements for WPP (such as adjusted average net debt/EBITDA) could well deteriorate as the global recession takes a toll at a time when the company’s balance sheet is burdened by the mainly debt-financed acquisition of [market research company] Taylor Nelson Sofres for GBP 1.6bn (including debt acquired).”

Moody’s said WPP’s liquidity headroom is currently adequate for its near-term operational needs, but will become increasingly narrow as the main refinancing date for the maturity of its GBP 850m of acquisition facilities for the TNS deal, which is due next year. The credit rating agency said it expected WPP to take timely and material refinancing steps over the next few months and to manage discretionary outflows such as acquisitions, share repurchases and dividends.

At 31 December 2008, WPP had a gross financial debt of GBP 5.64bn. Of this, GBP 1.53bn were maturing in the following 12 months, whilst GBP 4.1bn were long-term liabilities constituted by bonds and bank loans. The company also had GBP 1.3bn in cash available, excluding overdrafts. The most significant portion of current debt is GBP 1.25bn in overdrafts. In 2008, the company saw an overall increase of GBP 810.4m in borrowings. This was due to a GBP 1.27 bn increase in drawings on bank loans and a GBP 594.6m bond issuance. The increase was offset by repaying GBP 1.06bn worth of bonds. WWP has in place a series of bonds, a TNS acquisition facility of GBP 1.25bn and a USD 1.6bn revolver. The group, at point of reporting, had available of this total GBP 1.07bn undrawn at their disposal.

In the first seven weeks of 2009, up until 20 February, net debt averaged GBP 3.26bn. The group said that for two years after the TNS acquisition the share buy-back programme will be targeted at 1% per annum and dividend growth at 15% per annum, subject to review by the Board. “These actions, together with a reduced level of acquisition spend targeted at GBP 100m per annum, are expected to generate surplus cash and a reduction in the borrowing levels,” said the company.

Moody’s said that of WPP’s held GBP 1.3bn in cash and short term bank deposits, some of which are held in geographic regions where it may not always be accessible for central funding purposes. It said liquidity management therefore relies on the company’s USD 1.6bn committed revolving bank facility which matures in August 2012.

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