Feature

CLOSE-UP: LIVE ISSUE - CORDIANT. Overstretched Cordiant looks to core businesses to survive

Debt has forced a fire sale of peripheral operations at the group, John Tylee says.

Queens Park Rangers may be Michael Bungey's favourite football team but the plight of Cordiant, the group he ran until a few weeks ago, more closely resembles that of Leeds United.

Like Leeds, Cordiant has also opened its wallet too wide in the pursuit of glory. And, like Leeds, it has been forced into a fire sale to keep the bankers from its door.

Last week, the group was left to rue the folly of so many own goals when it announced its intention to dispose of its majority stakes in its Germany-based network, Scholz & Friends, and George Patterson Bates, Australia's second-largest agency. Financial Dynamics, its financial PR business, is likely to be sold back to its management.

David Hearn, Bungey's successor as the chief executive and the man charged with cleaning up the mess, has opted for what he hopes will be a leaner Cordiant, focusing on four core businesses which account for 85 per cent of its revenue. They are the Bates agency network, 141, its integrated marketing operation, Healthworld, its healthcare specialist, and Fitch, its branding and design group.

At the same time, Cordiant is said to be pushing Publicis Groupe to bring forward the date on which it exercises its option to buy Cordiant's 25 per cent stake in ZenithOptimedia. This may be difficult, because Publicis has the right to buy the stake at a pre-set price after 31 December 2003. Industry sources say Maurice Levy, the Publicis chairman, is in no rush.

Whether it will be enough to reduce Cordiant's debt burden (now more than £200 million) and restore the group's equilibrium is as debatable as the reasons how the group got itself into such a hole.

Some trace the roots of Cordiant's problems back to the "cash flash" culture of the Saatchi & Saatchi group from which it sprang in 1997. The vastly inflated price it paid to take over the then Ted Bates in 1986 was to have severe financial repercussions.

Once demerged, Cordiant was faced with a stark choice: sell or rebuild. Bungey chose the latter course. But in its efforts to catch up with its peers and diversify into higher margin and faster-growing marketing services, the group paid heavily for its lack of financial acumen.

As a result, Bungey overpaid for acquisitions, piling on debt.

As the economy nose-dived Cordiant was forced to renegotiate its debt on more expensive terms. To make matters worse, Hyundai defected last spring, three years after Bungey had paid $100 million for 80 per cent of the car manufacturer's Korean agency, Diamond Ad, to maintain its grip on the business.

But it was the $540 million purchase of the Lighthouse Group, including Fitch and Financial Dynamics, at the height of the dotcom boom, which seems to have sealed Cordiant's fate. By last year, the value of those acquisitions had plunged by more than two-thirds.

Whether Bungey was advised poorly or didn't listen is a moot point. Certainly, there's a belief that he didn't have enough high-calibre people around.

"It was a First Division management with Premier League aspirations," one observer comments. Bob Willott, the editor of Marketing Services Financial Intelligence, says: "Bungey is really an old-fashioned account man. Running an international business wasn't what he was best at."

Hearn claims the core businesses are operating closely - in some countries they're already under the same roof - and there's still a role for medium-sized independent groups on the global stage. "We aren't as big as the large companies and we're never going to be and we won't try to compete with them on their terms," he insists.

Instead, he is pinning his hopes on what he senses is a growing disillusionment of some major advertisers with the care and attention they receive within the big communication groups that can't replicate the independent offering.

The question is whether or not Hearn has assembled a winning combination.

By disposing of its interest in George Patterson, Cordiant has acknowledged the realities of an Australian ad market dominated by large local clients.

Scholz has had difficulty expanding beyond its domestic market and the lack of merger and IPO activity has depressed Financial Dynamics' business.

Nevertheless, doubts persist about the businesses left under the Cordiant umbrella. Healthworld's strong growth in Europe has been offset by the impact of industry consolidation in the US, while the downturn continues to hit Fitch. Meanwhile, the Bates network is an inconsistent performer.

The continuing lack of a clear identity for Bates worries some commentators.

Willott says: "I would have expected to see a higher profile and some good work by now, but I don't see signs of either."

Lorna Tilbian, an analyst at Numis Securities, believes that Hearn has acted sensibly in disposing of peripheral operations rather than going for a rights issue.

However, there's considerable scepticism that an independent future for Cordiant is really Hearn's game plan. "He is almost certainly stabilising Cordiant and making it shipshape so he can get out for the top price," Tilbian predicts.

For the moment, though, his goal is to restore some faded glory and push for promotion, just like QPR.

BUNGEY'S BUYS

1997: Cordiant Communications formed following demerger of Cordiant Plc and Saatchi & Saatchi. Assets include Bates Worldwide and a 50 per cent stake in Zenith Media.

1999: Buys Healthworld for $240 million. Also acquires Diamond Ad in South Korea for $120 million.

2000: Buys remaining 10 per cent of Scholz & Friends for $4.27 million. Spends $540 million acquiring the Lighthouse Group, which includes Financial Dynamics and Fitch. Also acquires PSD Associates, Donino White & Partners, Bamber Forsyth, Intercom and MicroArts.

2001: Increases equity stake in the Brazilian agency NewComm Bates from 32 per cent to 51 per cent.

2003: Announces intention to sell Financial Dynamics and to dispose of majority stakes in Scholz and Australia's George Patterson Bates.

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