Interpublic writes down its UK subsidiaries’ value by another £30m

Interpublic's main UK holding company wrote down the book value of its operating subsidiaries by a further £30 million in 2007 as the group continued its attempt to clean up its accounts and simplify its structure.   According to figures published last week, the cumulative amount written off the book value of acquired and home-grown subsidiary companies now totals an astonishing £391 million.

Interpublic’s UK holding company has accumulated losses of £494 million to date and is supported by substantial capital contributions from its US parent.  Its principal subsidiaries include McCann Erickson UK Group, MRM Worldwide, Lowe International, Weber Shandwick Public Relations, Draft Group and Octagon Worldwide.

Major Engine investor in disclosure controversy

Conservative party treasurer Michael Spencer, whose family-owned financial business has a substantial shareholding in The Engine Group, is at the centre of a controversy concerning shares in public companies that were pledged to secure bank loans without informing the Stock Exchange.

Spencer acquired an 11% stake in Engine in 2007 through INCAP Finance BV which in turn is owned by a company called IPGL that is under Spencer's control. 

The current controversy revolves around shares held by INCAP Finance BV in two public companies where Spencer is a director - the stockbroking business Numis Corporation and international money brokers ICAP.  Apparently the pledging of shares in Numis had not been announced when it first occurred in January 2008 or when the arrangement was restructured in October.

In a statement issued on 23 December Numis said that IPGL and INCAP had taken legal advice at the time the shares were first pledged but that "in the wake of recent press reports on this issue in relation to other companies IPGL sought further advice and concluded that notification should have been made".

Engine's chief executive is Peter Scott and its best known marketing subsidiaries include WCRS, Partners Andrews Aldridge and the Mandate public relations business. Under Scott's leadership the group has expanded rapidly by acquisition, helped by private equity funding.

IPGL donated over £1 million to the Conservative Party in the year to 31 March 2007.

© Fintellect Ltd

Huntsworth share reorganisation: substance or image?

Why the publicly listed Huntsworth global public relations business should announce last week that it wanted to be able to buy back some of its shares, when at 30 June it already owed more to its short-term creditors than it had available in readily realisable assets, is perplexing to say the least.  And, judging by the continuing fall in its share price, that perplexity seems to extend also to the London stock market.

Of course the company may think its shares are so underpriced that it would like to be able to supplement its trading profits by gains it can make from any future upturn in the shares' performance.  Or it may simply wish to improve its earnings per share by reducing the number of shares in issue.  In either case, if it really wants to buy in some of its shares it could probably pay for them by using some more of its long term bank borrowing facility, assuming it becomes difficult to generate enough cash from its trading activities and its working capital remains a little thin.  

Or is this just a PR stunt to counter any negative publicity flowing from its eviction from the group of companies that comprise the FTSE All-Share Index?   According to Huntsworth's chief operating officer Sally Withey it's certainly not a PR stunt, but a necessary response to the practical consequences of the eviction.   Investment funds that track the All-Share Index will be obliged to sell any Huntsworth shares they hold and the company may wish to buy back some of those shares. 

However, Huntsworth says that such a buyback would be rather difficult if the share price remained below its 50p face (nominal) value because shareholders had given the company authority to do so only if the price was no less than the 50p face value. And anyway it's not particularly good for a company's image to have shares with a market price nudging 30p when their face value is 50p, as was the case before the proposed share reorganisation. 

Hence the decision to split each of Huntsworth's existing shares into 50 smaller ones and in doing so to convert 49 of them into deferred shares whose rights according to Huntsworth would be "effectively worthless".  With the market price of Huntsworth shares reluctant to go up, the only alternative was to pull the face value down - in this case to 1p.  Shareholders will be asked to approve the split at a meeting to be held on 30 December.

Meanwhile, various directors of the company have bought about 4 million shares that came onto the market in the few days up to 22 December - representing about 2% of the total shares in issue - and this seems to have stemmed the fall in price for the time being at least.  Hopefully the price paid by those directors of about 24p per share will eventually prove to have been a bargain.

© Fintellect Ltd

Who would believe it?

The season of silliness is upon us.   A public company in the marketing services sector has just announced it plans to buy a very small collection of companies from another public company although it is very strapped for cash and hasn't obtained shareholders' approval yet.  The prospective selling company notes that the performance of the businesses it is selling is insignificant and the sale proceeds only slightly less so.

So who are the parties to this hard-to-believe transaction?   The prospective buyer is called IQ Holdings and the target is a collection of market research businesses currently owned by Media Square.

The businesses expected to be sold are The Wire, Viewpoint Field and Viewpoint Studios.  Media Square says they lost about £30,000 between them before tax and non-recurring items.  IQ Holdings expects to pay an initial £750,000 in cash and £250,000 in shares, followed by up to a further £500,000 in cash depending on performance over the next three years.

IQ hopes to raise about £268,000 of the £750,000 cash required to acquire the businesses from a share placing.  However, the company cautions that "if the placing and acquisitions were not to proceed and the new term loan banking facility and recourse factoring facility were not obtained, then the company may not be able to continue as a going concern". 

Earlier this year IQ published its accounts for the year to 30 September 2007 showing short term liabilities (including large amounts due to the tax authorities) that were substantially in excess of readily realisable assets.  Those accounts noted that an additional £475,000 had been raised after the year end in connection with a further acquisition and were accompanied by an auditors' report saying that the company's circumstances "indicate the existence of a material uncertainty which may cast significant doubt about the company's ability to continue as a going concern".

Whether IQ's latest little acquisition will be approved by shareholders, and whether it will help restore its financial health remains to be seen.  As to whether Media Square will gain any significant benefit from its modest disposal is also an open question, although £750,000 in cash is not to be sniffed at.  Both must be wishing for a happier New Year.

© Fintellect Ltd

Claydon's Z Group must complete acquisition by 7 January to retain AIM listing

Z Group the AIM-listed vehicle chaired by Jon Claydon, the former chairman of Zulu and Claydon Healey, will have to complete an acquisition by 7 January if it is to retain the right to trade its shares on the stock market.   According to its half-year report published last week, Z Group is "actively pursuing potential acquisitions, which are at various stages of discussion at this time".

Claydon has also joined the board of digital agency Work Club.

© Fintellect Ltd

Odds still seem stacked against successful Bolloré bid for Aegis

If Vincent Bolloré has serious designs on acquiring Aegis Group - whether to merge it with Havas or otherwise - now may not be the best time to make an offer.  

The departure of chief executive Robert Lerwill and the downward fall in its share price may suggest there is an opportunity to acquire Aegis on the "cheap", although its share price decline has been no more severe than that of many others. But apart from the price being cheaper, there's not much else that suggests a successful deal is in the offing.   Consider these facts:

1. Groupe Bolloré has just reported a massive half-year loss of £166 million after writing down its Havas investment by €204 million, albeit before including a €358 million gain from selling some of its shareholding in steel tube manufacturer Vallourec - not the type of performance that would seduce many Aegis shareholders.
2. Havas still looks the junior partner in any prospective Aegis merger despite its improving performance - half year figures at Aegis are always disproportionately lower than the full year.
3. Despite its reduced share price, the market is currently valuing Aegis at £730 million and its shareholders would probably want a lot more than that.  Moreover, in the current unpredictable economic climate they would almost certainly want it in cash rather than in Bolloré or Havas shares.
4. If Bolloré or Havas were to offer cash for the Aegis shares not already in its ownership at the sort of price Aegis was worth two or three months ago, it would increase their ratio of borrowings to shareholders' funds to worrying levels in an uncertain economic climate.  For example, the Groupe Bolloré debt/equity ratio would jump to nearer 0.8:1 and Havas net debt would exceed its shareholders' funds.
5. The idea that Bolloré or Havas could reduce the scale of borrowings required by selling on the Aegis research division (Synovate) to someone else for cash is less likely today.  In the past WPP has been mentioned as a prospective buyer but WPP is now busy digesting the Taylor Nelson Sofres research group. One possibility would be the US listed group Harris Interactive (best known for its Harris Poll), but only because Bolloré has already bought a 12.45% stake.  Harris is only one quarter of the size of Synovate, making any viable deal structure hard to contemplate.  It also seems improbable that Germany's GfK will be able to attempt another deal after failing to raise the cash to outmanoeuvre WPP in its TNS bid. Market research commonly generates a lower profit margin than other marketing services and Synovate seems unlikely to attract any other obvious cash buyer at present. 

However, there may be other influences at work.  With chairman John Napier also taking over Robert Lerwill's chief executive role, the dynamics will be strongly influenced by what Napier wants.  He's not an advertising man by background, but has a past record that contains a surprisingly large number of companies that have been bought or sold under his management.  That may be something he has in common with Bolloré.  However, Napier has also overseen the successful restructuring of insurance giant RSA which, if anything, has made it more bid-proof.  

It is unlikely that Napier will have much interest in presiding over an independent UK-based Aegis just for the sake of it.  First and foremost he will wish to demonstrate he can realise good value for the shareholders - whether in the short-term or over a longer period. He may be more interested in doing a deal than the previous Aegis management team of chairman Colin Sharman and Robert Lerwill would have favoured.   Equally he may believe he can improve group performance and thereby see off Bolloré for good.   If there is to be a deal, let's hope that at least the price is right.

© Fintellect Ltd

BMB-Cheil deal follows a growing trend

The reported acquisition of a 49% minority shareholding in Beattie McGuinness Bungay by publicly listed South Korean marketing group Cheil Communications follows a growing trend, although the eventually intention is clearly to progress towards 100% ownership.  

Last year WPP bought just under 50% of CHI & Partners without any assumption that its stake would be increased, following the precedent set by the Leo Burnett-BBH deal some years ago.  Earlier Hakuhodo had done something similar with Mustoes, although it reduced its stake in 2007 after the agency's fortunes declined.

Other acquirers have simply bought 100% control in a succession of tranches over time.  For example, Next Fifteen Communications Group acquired Lexis in stages, starting with a 25% stake. Cossette Communication Group has bought majority stakes in Miles Calcraft and Dare Digital, to be followed by further tranches later. 

The terms of the BMB deal have not been disclosed but a typical valuation of the entire BMB agency would have been approaching £10 million earlier this year, putting a price tag of around £5 million on the initial shareholding, assuming the terms of the deal do not justify any discount for a minority stake.   BMB made a pre-tax profit of £1.1 million in 2007, but that was helped by an above-average profit margin of 19.2% which may not be maintainable.  

Cheil Communications made a post-tax profit of £31.5 million in 2007 (down on 2006) and looks set to report further growth in 2008.

© Fintellect Ltd