Interview with Lowden on Gfk merger

David Lowden, CEO of TNS, argues the case for a merger with Gfk in this Q&A interview provided by the market research firm.

You are continuing with your proposed merger with GfK despite the increased offer from WPP. Just to pick you up on this, what is the rationale behind you thinking that GfK is still the right deal for TNS shareholders?
Well we start from a point that both TNS and GfK are very good businesses in themselves. If I take a look at TNS, here we are growing by nearly 20 percent in the first five months, around 6 percent on an underlying basis. We've put in place a very successful strategy. GfK are very, very similar. It's had 5 percent growth in the first quarter. It's performing particularly well in a number of sectors. As we bring both of those two businesses together, we're bringing two strong businesses that will have a leadership position within our industry.

Not only that, not only will we be a leader in major markets, but we will actually be able to bring a completely new model to our clients. We will focus on specific industry sectors where we will have, at the core, a syndicated service, a service that actually measures individual markets and it seeks to understand whether it is consumer behaviour in the fast moving consumer good area or in the retail and technology space. It looks to understand what people are viewing on television, or how people are buying new cars, or pharmaceutical products. Here we will have a market measurement measuring the behaviours of individuals.

Around this, we will be able to put our custom business that will look at understanding the attitudes of people - how they are responding to brands in the market place, what is influencing their buying decisions. We will link that attitudinal information to the behavioural information and give a response to our clients about what they're putting into the market in terms of stimulus and how that is impacting behaviour.

Now that is something that is unique to GfK and TNS, the combined entity, the new company. That is something that none of our competitors will be able to offer.

Nevertheless though, of course, you have rejected the increased 260p per share offer from WPP. Talk me though the rationale behind this rejection.
It's a case of looking at TNS firstly on a standalone basis. We've looked at what the growth opportunities are for TNS. We've put in a very successful strategy that is delivering strong growth within our business. We are in an industry that is different from many of the other elements of the media industry. It is an industry that is growing. Peoples' demand for information is increasing as a result of the challenging times that we're in. So we believe that the growth prospects of TNS by itself are actually very, very good and therefore, our valuations, and valuation of the company, takes that into account. What has been put on the table by WPP is clearly well below the valuation we consider this business to be worth.

Now on top of that, take a look at then what are the benefits of bringing GfK and TNS together and that is going to deliver good shareholder return as a result of the merger.

Now just to pick you up, there have been a number of challenges laid at TNS's door. One of them surrounds your stated objective to achieve beyond 15 per cent margins in the medium term, that's in the merged entity. What's your response to this claim that 15 percent is something that actually hasn't been seen in the industry before?
I would argue that there are examples throughout our industry that have achieved margins that do in fact exceed 15 percent - people like Neilson Media, IMS in the healthcare area. You've got businesses like the retail and technology business within GfK, or our own consumer panel businesses. There we're seeing margins that are in excess of 15 percent. In some cases they're in excess of 30 percent. So to say that margins within the industry have not been seen at this level is just simply untrue.

Now, I will give that these are syndicated services, they're the market measurement services that we see as being very important. What the merger between GfK and TNS does, it takes the level of syndicated services that we're offering up to around 40 percent. 40 percent of our revenue will be in these long-term higher margin types of businesses. Actually, it represents around 60 percent of the profit for the combined group. So this is a very good business to be in. So that is one of the ways in which we will realise margin improvement through a change of the mix of the combined business.

The second area, I would say, is that we are increasingly looking for advisory services. So this bringing together of the attitudinal information together with the behavioural information brings new value to our clients and our clients will pay for that type of information on a different basis to how they will pay for the traditional custom services.

In the custom services we will be looking to improve the margins within that business. So we have a higher margin business from our custom activities than in the GfK business. We will be looking for improvements therefore in bringing up the overall margin there.

Finally, there are of course, as a result of this merger, substantial cost savings. We estimate that these will be at least EUR97m from the combination of the two businesses together. That in itself will deliver substantial margin improvement.

Another allegation that's been laid at your door is that you haven't given WPP all the information that it has requested. What's you're response to that?
Well quite frankly I don't know how much more we could do. We spent four and a half hours in a management presentation taking them through every single part of our business; the same presentation we gave to GfK management. On top of that they've asked for information with regards to our clients. They want to see our top clients, the profitability of the clients and they even wanted to understand how much the BARB, contract which we recently won from them was achieving in terms of margins. But that's information we're not going to share with a competitor. I don't think it will be in the interests of our shareholders for us to do that.

But with regards to financial information, they've had all the same information as the GfK management and I don't understand why they cannot, given the amount of time they've had, use that as a way in which to value this company appropriately.

How concerned are you that the GfK Verein, the majority shareholder of the company, has delayed the meeting where it will actually vote on whether it agrees with the merger?
Well just as we at TNS have been managing the process with informing our shareholders, GfK are informing their shareholders, including the Verein. We have a commitment from the Management Board of the Verein to support this deal. Yesterday there was a vote of the Administrative Board, the broader group within the Verein, again supporting the overall deal. Today there is a meeting of the General Assembly of the Verein where the information about the benefits of this merger will be put in front of the Verein members. They will then have a chance to consider this and, in an orderly way, vote on this on the 21 July.

So that's the Verein, but looking at the wider picture, what happens next?
Well it's very much the timetable that we sent out to shareholders on 25 June in our prospectus and circular. So we will be looking for a vote at an Extraordinary General Meeting on 18 July to support this deal. Following that support, we will put a formal offer to the shareholders of GfK, an offer I think that they will see will bring substantial value to them as shareholders, but also benefits to our clients and also to our people.