Adam & Eve's £110m earn-out deal puts a premium on cultural impact
A view from Gideon Spanier

Adam & Eve's £110m earn-out deal puts a premium on cultural impact

Adam & Eve's most famous client prides itself on being "never knowingly undersold" but the agency's founders certainly didn't under-sell themselves.

When Adam & Eve sold to Omnicom in 2012, their corporate advisers Clarity, lawyers Osborne Clark and accountants Kingston Smith helped to negotiate an uncapped, five-year earn-out, and it turned out to be quite a deal for John Lewis’ ad agency.

Campaign has revealed the earn-out was worth an estimated £85m – more than three times the £25.2m that the founders originally got for selling in May 2012.

That’s an estimated, total payout of £110m for an agency that was only founded in 2008 by James Murphy (who got £27.5m), David Golding (£27.5m), Ben Priest (£24m) and Jon Forsyth (£13m).

They are not in the same league as tech founders. Facebook floated on the US stock market in the same month that Adam & Eve sold, but £110m in nine years is a good return for a creative business.

Adam & Eve/DDB’s founders and Omnicom won’t comment on the earn-out.

But there are lots of observations we can take away:

  • A recession can be a good time to launch a business.
  • It’s never too late to found an agency – the four founders were in their late thirties and early forties when they set up Adam & Eve.
  • London was a great place to build a creative business in the pre-Brexit days when it was the financial and creative capital of the European Union and a magnet for clients and talent.
  • Joining a big, global network, DDB, gave the merged Adam & Eve/DDB business more opportunities to work with international clients such as Volkswagen, H&M and Samsung and being financially successful meant Omnicom hasn't interferred.
  • Creating big, beautiful, ambitious work that has an impact on culture and is highly effective are both unique points of difference and carry a premium for which clients are willing to pay.

That final point – about making work that "explodes in culture", as Adam & Eve/DDB’s creative team likes to say – is the most important, especially when doom-mongers have been talking about the decline of advertising.

The agency has repeatedly proven it can create advertising that becomes part of the national conversation not only for John Lewis with all those Christmas ads but also for Harvey Nichols, H&M, Marmite and more.

A small but defining moment came when the agency’s "Bear and the hare" film for John Lewis in Christmas 2013 was spoofed on the front cover of Private Eye just after the ad debuted. Now that’s impacting on culture.

And the John Lewis work went on to win two IPA Grand Prix awards for effectiveness for delivering financial returns.

Golding wrote in Campaign earlier this year about the difference between creating culture and marketing collateral and it is clear where Adam & Eve/DDB stands in an era when brands are pumping out endless collateral on social media.

Creativity requires frequent infusions of new ideas and new blood and if there’s a secret to Adam & Eve/DDB’s sustained creative record, it’s that Priest has refreshed the creative leadership team several times over the last nine years.

Working out whether Omnicom has got a good deal out of buying Adam & Eve and merging it with DDB is hard to measure – not least because the accounts filed at Companies House in the UK are thin on detail.

The reputation of DDB UK and the wider, global DDB network has benefitted from buying growth.

"They saved the network," one Omnicom executive told me after Adam & Eve/DDB won most awarded Agency of the Year globally at Cannes Lions in 2014.

Adam & Eve was making an annual profit of £3m before it sold, making the £25.2m upfront purchase payment a multiple of eight times annual profits.

DDB UK was making a profit of around £5m at that time and struggling.

Fast forward to 2015, the last year when accounts have been published, and DDB UK, the parent of Adam & Eve/DDB was making a profit of £12.5m, which suggests a 50% or £5m improvement in three years.

That's probably a significant understatement, given holding companies are known for extracting cash from their agencies through "cross-charges" and other tools.

DDB's UK annual billings almost doubled from £84m to £165m and annual revenues jumped 60% from £44m to £70.6m between 2012 and 2015.

The fact that the earn-out kept rising – from £17m to £50m by the end of 2015, according to accounts for DDB Europe, and hit an estimated £85m by the end of 2016 – was another sign of strong growth.

The founders certainly had an incentive to keep growing the business, as they showed by winning Samsung in north America in autumn 2016.

We are in the realm of speculation, but if DDB UK was hypothetically making an extra £15m or £20m in profit a year by the end of the earn-out compared to 2012, then £110m doesn’t look crazy as a profit multiple.

A financial source warns against leaping to such conclusions. Earn-outs involve complex calculations and Omnicom is likely to have ensured it made a good profit, the source says.

The big question is whether Adam & Eve/DDB’s success could continue if the founders departed – a subject of much chatter.

Murphy, Golding and Priest decided to stay after the earn-out ended but Forsyth has left to seek new challenges.

With one eye on their legacy, they promoted a capable UK management team last year.

So far, Murphy, Golding and Priest show no sign of wanting to move on, despite having enough money to retire or to launch a new business.

The challenge, if the trio choose to take it, is to build Adam & Eve/DDB into an agency that can match Bartle Bogle Hegarty or Abbott Mead Vickers with a 30-year record.

Good luck with that.

Not that Adam & Eve need it. The founders have made their own luck.

The £110m payday shows that impacting on culture carries a premium.

Gideon Spanier is head of media at Campaign