WPP up as Grey takeover goes down well with investors
By Gordon MacMillan,, brandrepublic.com, Monday, 13 September 2004 02:30PM
LONDON - Shares in WPP Group climbed as high as 3.4% this today, before slipping back as investors reacted well to the advertising giant's $1.5bn (£845m) bid for Grey Global, despite initial concerns that the British firm might have overpaid.
This morning, WPP's shares were up 3.4%, or 17.5p, to 531.5p. However, in afternoon trading its shares slipped back and were up 0.97% at 519p. Industry experts had warned that paying more than $1bn, or more than three times the multiple that the company's first-half results would normally justify, could be over the odds for Grey.
WPP's bid, which defeated private equity firm Hellman & Friedman and Havas, values Grey at $1,005 a share, higher than the $900 a share, or $1.25bn, it had been expected WPP would pay.
However, investors were reassured partly by the savings WPP has identified it can make. Initially, it said it has identified £11m of synergies that will make Grey more profitable.
Lucy MacDonald, head of global equities at Dresdner RCM Global Investors, told Bloomberg: "It's a very sensible, logical deal. There are high-quality clients.''
The deal brings to WPP a number of new clients, most significantly the world's largest advertiser Procter & Gamble, a major client of Grey, and which had given its blessing to any possible WPP bid.
It means that WPP now has major client relations with the world's two largest consumer goods giant in Unilever and its US rival P&G.
Sir Martin Sorrell, group chief executive of WPP, said: "The addition of Grey Global Group to WPP will bring a number of benefits to our clients, our people and our shareowners. In addition to broadening our relationship with a number of our leading clients, Grey will bring access to new clients, strengthen our activities in advertising, media investment management, public relations, healthcare and direct and interactive."
As part of the deal, Ed Meyer, who has spent 50 years working at Grey, will net a personal fortune of almost $336m (£187m), will stay on after the acquisition is complete. He will sign a new employment agreement with WPP, under which he has agreed to continue as chairman and CEO of Grey until at least the end of 2006.
Meyer will serve as CEO and chairman of Grey Worldwide until a successor is appointed within the next six months.
Meyer said: "Grey's greatest asset is its people, and while the ownership structure will change, our day-to-day business relationship with our clients will remain unchanged."
For Havas, the loss of Grey Global is a particular blow, as the deal was seen as the mid-sized French group's last real chance to step up and compete with the major holding companies such as WPP and its rivals Omnicom, Publicis Groupe and Interpublic Group.
In a statement, Havas said that it had declined to increase its initial offer arguing that increase in the price would have compromised its ability to deliver a speedy return on investment for Havas's current shareholders.
Alain de Pouzilhac, chairman and CEO of Havas, said: "When an opportunity like Grey comes to the market, it is our duty to assess whether it can significantly add value to our group. At the end of the offer process, we concluded that the price required by Grey would not allow us to generate sufficient added value for our shareholders.
"As a result, we did not increase our offer, so as to remain totally focused on the objectives I set our teams over a year ago: to relaunch our group to rapidly reach the same growth and operating margin levels as the market leaders."
From the start, WPP was best placed of the three bids to be able to find efficiencies and make the deal financially viable. As well as the £11m of synergies and said it saw further benefits in staff productivity, combining property and IT infrastructure, and combining purchasing power.
The enlarged group's long-term margin goals remain unchanged. WPP businesses without Grey maintain the 2006 margin target of 15% or more, giving a new target for the enlarged group of 14.5% or more for 2006.
WPP is projected that the Grey businesses are targeted to deliver a return on capital employed above WPP's weighted average cost of capital in 2007, when the Grey margin is targeted to reach 12.5%.
Grey's advertising agency businesses will continue to be run as independent units within the WPP group of companies. WPP said that Mediacom would "explore opportunities to leverage the media buying scale of Group M", WPP's media investment management parent company.
The victory sees WPP take control of a fourth major advertising network in Grey Worldwide, which joins Ogilvy & Mather, J Walter Thompson and Young & Rubicam, as well as the media buying powerhouse MediaCom, which becomes the UK firm's third media network alongside Mediaedge:cia and MindShare.
In addition to Grey Worldwide and MediaCom, WPP will take ownership of PR networks APCO and GCI Group.
Other new clients coming to WPP include 3M, Adobe, Boehringer Ingelheim, JP Morgan Chase, Conagra, Hasbro, Mars and Warner Bros. The deal also strengthens the relationship with existing clients including BAT, Diageo, GlaxoSmithkline, Nokia and Pfizer.
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