Close-up: Live Issue - What hope for Havas as an independent network?

Speculation over the future of Havas can't hurt its share price, Bob Willott calculates. Mounting speculation about who might buy Havas is understandable as Vincent Bollore hawks the company around as if he owned it. Maybe French arithmetic works differently from what we are used to in Britain, but a 20 per cent shareholding doesn't amount to control over here. It doesn't even get near the 29 per cent threshold where in the UK Bollore would have to make a bid himself.

So what's his game? And why should anyone play?

Game number one might have been this: Bollore reflects on the fact that WPP's chief executive, Sir Martin Sorrell, has bought enough additional revenue with Grey Global Group to be just a few million dollars behind the mighty Omnicom. He paid generously to acquire Grey. Why shouldn't he be prepared to pay even more generously to acquire Havas if that propels his empire into the numero-uno position in the market?

Game number two: Bollore talks to his "friend" Maurice Levy and rumours start to flow from Publicis Groupe's Champs Elysees emporium about an all-French merger. This prompts Levy to make a slightly less than comprehensive public denial, which will simply add greater credibility to the whole idea. Sit back and see what happens next. Another competitive auction?

Game number three: Get enough people and the press talking about what Bollore might do to the Havas business itself, let alone its shares, and the Havas share price will rise on speculation alone - offering him the chance of a quick buck along the way. Judging by the share performance in September alone, that's already happening. Despite announcing a massive share issue and losing out to WPP in its bid for Grey, the share price has climbed back almost to where it stood last January.

So how much, if any, credence can be attached to the various games Bollore might be playing?

Let's look first at the WPP option. There always was a certain strategic attraction in the idea of merging Havas with Grey. For example, it would have given Havas a much more credible advertising presence worldwide - especially in the US - and would have added some real clout to their combined media buying operations. It would have enabled Havas to behave more like a global competitor instead of promoting a differentiated offer instead. The integrated offering Havas espouses is not unique - it tends to appeal to less sophisticated and/or lower budget clients, and that's no way to build a leading global business.

Culturally, the managements of Havas and Grey may not have been natural bedfellows, but Havas' chief executive Alain de Pouzilhac's bid was strategically valid and his offer price will probably prove to have been more realistic than the winning bid from WPP (although WPP may be in a position to achieve greater savings).

So if a Havas-Grey link up would have made some sense in isolation from WPP, why not put them together within WPP? Ignoring the unease that Havas is likely to feel towards a British competitor that has twice trumped its bid attempts (for Tempus as well as Grey), WPP's balance sheet still looks strong enough to take on another acquisition. Shareholders' funds far exceed its net borrowings, and so it would be possible to borrow more money to fund an acquisition if necessary. But that does assume shareholders' funds are unlikely to be diminished by any further write-downs that would arise if the £6.4 billion spent on intangible assets such as goodwill and trade names inherited from WPP's past acquisitions could no long be justified by the profits they earn.

Many would argue that WPP has enough on its plate just at the moment and the absorption of another group of companies might prove a step too far. And, while Sorrell may be happy to talk to De Pouzilhac, at present there is no obvious sign of an entente cordiale.

So what about an entente domestique? Nothing has happened to suggest that Levy is losing any of his thirst for expansion - except a slightly over-stretched balance sheet. Public opinion has rather assumed that, of the two French global groups, only Havas was over-geared.

Nothing could be further from the truth. Although Havas has suffered a succession of big losses, for the time being it has a sound balance sheet - thanks to its recent 389 million euros share issue. By contrast, Publicis has been heavily burdened with debt for some time.

Last December's balance sheet is open to various interpretations, but what is certain is that the amount shown as net borrowings was less than would be shown in other countries such as the US. (Even the French authorities questioned the previous year's presentation.) By international standards, Publicis owed more than one billion euros while shareholders' funds were substantially lower at 781 million euros (see table). To most observers, that represents a heavily over-geared balance sheet - one that would make it difficult for Publicis to borrow more cash for a major acquisition.

To alleviate the situation, the company is now engaged in some intricate financial manoeuvres that will bring the debt down to a slightly less worrying level.

Nevertheless, if Publicis is hankering after Havas, almost certainly Levy would have to make the offer in shares - leaving Bollore with a pile of paper that may or may not realise the profit he must be seeking. Alternatively, Publicis might try to raise extra cash by following Havas' example and arranging a new share issue in advance - a move that may knock the Publicis share price down even further.

That may not create many friends among former Bcom3 shareholders who, from September next year, will be entitled to exchange bonds valued originally at 30.10 euros for shares that are worth only about 23 euros today.

All in all, there are plenty of reasons why both WPP and Publicis would like to own Havas, and plenty of reasons why they may not choose to do so. That said, Bollore has already seen the Havas share price rise and game three may prove the easiest one to win.

- Bob Willott is the editor of Marketing Services Financial Intelligence (www.fintellect.com) and a special professor at the University of Nottingham Business School.