Johnny Hornby and other senior members of The & Partnership are to collect an estimated £30m windfall, after selling shares to long-standing minority owner WPP in a complex deal that allows them to keep majority control.
The deal values The & Partnership at about £160m – or roughly two-and-half-times the £60m valuation when WPP first bought a 49.9% stake in the agency group in 2007.
Hornby and his management team still own 50.1% of The & Partnership, which they control through a separate holding company, CHI & Partners Holdings.
They have released the cash by selling about 42% of the shares in CHI & Partners Holdings – equivalent to 21% of the total economic value of The & Partnership.
It means WPP now owns about 71% of The & Partnership – 49.9% directly and 21% through CHI & Partners Holdings – and it will take a larger share of profits.
However, Hornby and his management team still retain control, because they own about 58% of the holding company, which in turn controls a 50.1% stake in The & Partnership.
Hornby, chairman and chief executive of The & Partnership, said the deal offered "the best of both worlds" because the management has been able to sell some shares but have kept most of them and all of the senior team have recommitted for at least five years.
An industry observer said the way the share sale has been structured was unusual but suggested that it looked like a smart way to release cash without changing control.
Management team 'reinvesting'
Hornby, one of the best-connected figures in UK advertising, with a penchant for throwing yacht parties at the Cannes Lions, was the top shareholder in CHI & Partners Holdings with about 55% before striking this new deal with WPP.
It is thought that he has sold upwards of £15m worth of shares – less than half of his holding.
Other members of senior management have also sold an estimated £15m between them.
About 20 members of the top team, including long servers such as Sarah Golding, chief executive of The & Partnership London, Nick Howarth, chief executive of The & Partnership Europe, and Jess Burley, global chief executive of media agency M/SIX, own shares.
Most but not all of them sold some stock – as did Simon Clemmow and Charles Inge, who co-founded the agency with Hornby in 2001 and still had some shares, despite stepping back from the business some time ago.
None of the current management team sold more than half of their shares.
Together with Hornby, they still own about £45m worth of shares, which they are "reinvesting", rather than exercising the right to sell all of their stock.
Hornby struck a deal with WPP just days before the UK general election in December 2019. He was said to be worried that Labour leader Jeremy Corbyn might win and crack down on tax relief for entrepreneurs.
Companies House filings show CHI & Partners Holdings changed its share structure on 11 December and Hornby confirmed the deal when he was approached by Campaign.
The & Partnership declined to confirm any numbers as the exact amounts have yet to be finalised.
Some of the estimated £30m payout depends on The & Partnership’s financial performance in both 2019 and 2020.
Moving closer to WPP
The & Partnership’s management team could have sold all of its holding or WPP could have demanded to buy them out completely under what is known as a "put and call" option agreement.
However, Hornby agreed a new deal with WPP chief executive Mark Read, who previously sat on the board of The & Partnership from 2007 to 2015, because both sides are happy with their joint venture.
The & Partnership and WPP agencies share a number of clients, including News UK, and have grown closer, winning an expanded joint brief from Centrica in a global consolidation last summer.
When Clemmow, Hornby and Inge founded the agency, it was known as CHI & Partners, but Hornby rebranded it as The & Partnership in 2013 as it expanded beyond creative into areas such as media, content and data.
More recently, he has pushed for a joined-up, "on-site" model that involves staff working in the offices of clients such as Toyota and the Royal Bank of Scotland.
"After this period of success, for our business and our clients, we had the opportunity to sell the majority share of our business to WPP, but unanimously our partners didn’t want to do that," Hornby, who is 53, said.
"We are all too young, even me, and enjoying the work we are doing with our ‘new model’ clients too much.
"We relish the partnership and strong relationships we have with Mark Read and his WPP team, but relish, too, the independence we enjoy and the freedom to keep developing and growing our &Model, our way."
Hornby went on: "WPP in the end have offered us the best of both worlds – the ability to reinvest the majority of our shares, for the next five years or more, and at the same time the opportunity for some partners to realise some value for their hard work over the past 19 years.
"In doing this, we are crucially maintaining independence and full control of our business."
Hornby and his team could see the value of their £45m worth of shares increase if they can keep expanding the business.
The & Partnership reported a 12.4% increase in fee income to £95.7m and a 35% leap in earnings before interest, tax, depreciation and amortisation to £19m last year.
Earnings have trebled since 2016 and the group now employs 1,600 people around the world.
An estimated £160m valuation would be a multiple of more than eight times last year’s earnings, which an industry source suggested was a fair price. WPP was the only likely buyer.
The valuation would rank The & Partnership among the most successful UK agency launches of the past 20 years, on a par with Adam & Eve/DDB and Essence.
Read said: "Johnny and his team have delivered fantastic growth over the past seven years [since becoming The & Partnership] and we are delighted they are reinvesting and recommitting for the future.
"Our close partnership with them is bringing new and innovative models to clients looking to transform their marketing capabilities."
Hornby added that he was happy to strike a new deal, saying that "WPP is now a much more open, more data- and digitally driven partner" since Read took charge in 2018, and it means The & Partnership can make more use of WPP's tech capabilities in Wunderman Thompson and Group M.
Read’s willingness to invest in The & Partnership is significant because WPP has sold stakes in dozens of other businesses, including Kantar and Chime, to simplify the group and cut debt in the past 18 months.
WPP’s revenues went into reverse in the final year of Sir Martin Sorrell’s reign as chief executive and Read has launched a three-year turnaround plan to return to growth.
Hornby said The & Partnership could hypothetically keep its independence for years to come as he expects younger talent will continue to buy shares from the current leadership – like a partnership in a law firm.
When Clemmow and Inge sold some of their shares previously, other executives were able to buy them.
Hornby said: "My intention is we’ll create a scheme to let the next generation buy [more] shares, so that it can continue in perpetuity.
"The history of advertising is littered with people building great agencies and then selling up and walking away and these agencies turning into a shadow of themselves.
"The model where you rev it up to be as big as possible and the biggest talent takes all the money hasn’t built sustainable businesses."
An M&A advisor who was not involved in The & Partnership deal predicted that WPP was still likely to take full control.
"Assuming things go well, they’ll sell the rest to WPP over time," the advisor said. "When you do a 49.9% deal, the ultimate owner is always likely to be the 49.9% shareholder."