As bidders line up, analysts warn on overpaying for Grey

By Gordon MacMillan,,, Tuesday, 07 September 2004 08:40AM

LONDON - As bidders line up for Grey Global, industry analysts have warned of the danger of overpaying for the US advertising group, which could be sold for as much as $1.3bn (£730m).

The current price tag, in excess of $1bn, is three times the multiple that the company's first-half results would normally justify, according to the industry newsletter Marketing Services Financial Intelligence.

The newsletter argues that the $1bn market value, which will net Grey chairman Ed Meyer $200m for his share, is based on several unproven assumptions.

Top of the list of these suppositions is that Grey's current annual revenue of $1.3bn can be maintained under new ownership and that Grey's poor operating margin of 6.5% can be boosted to a more normal 15% with new owners.

However, this could be a problem, according to newsletter editor Bob Willott, who asks that if part of the cause of Grey's poor margins is underpricing, will clients resist attempts to improve revenue?

"If these two assumptions could be made good, Grey's post-tax profits would jump to about $110m per annum. A multiple of anything over 10 times that profit would support the current market value, although some would -- and should -- ask why a buyer must pay for the improvements that the seller has so far failed to produce," Willott said.

The high price for Grey is also based partly on the closely traded share price, which has held firm above $880 during most of August, and improved results. However, this is still three times the multiple that annualised post-tax profits of $34m would normally fetch.

As WPP Group looks almost certain to bid tomorrow alongside US private equity group Hellman & Friedman and possibly Havas, investors are worried that it will overpay for Grey.

Looking at WPP's past acquisitions, Willott argues that despite an 11% improvement in the $105.9m post-tax profits reported for the first half year, WPP still has to prove it can achieve the level of return on its capital that some might expect it to.

Analysts are already predicting the battle will come down to a fight between WPP and the private equity firm, with Havas already being relegated to the sidelines.

Bruno Hareng, a media analyst at ING Financial Markets in Paris, told The Wall Street Journal: "I don't think it's really likely that Havas will acquire Grey."

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