Cagney is still struggling to restore its financial fortunes although chief executive Steve Mattey announced this morning that the business has been trading profitably during the first quarter of this year.
Last year the group suffered a post-tax loss of £3.7 million after writing down the cost of past acquisitions by a further £3.5 million (mainly relating to Cubo - still described as "the group's most successful company") and suffering a £338,000 payroll cost relating to personnel serving out their notice. Nevertheless the group reported a modest £34,000 operating profit before those exceptional charges, up from a £547,000 loss incurred in 2007.
Prospects of a more profitable future will doubtless be a factor under consideration by the unnamed party that is still in discussions about a making a bid for Cagney although, after six weeks, the company is right to remind shareholders that this does not necessarily imply that an offer will be received.
The group balance sheet remains fairly weak with bank borrowings of £1.7 million making up about one-third of its capital base and current liabilities (excluding bank debt) still exceeding readily realisable assets.
© Fintellect Ltd
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Today's announcement of M&C Saatchi's respectable financial results for 2008 contrasted with the gloomy mood that had prompted the stock market to slash the company's share price by half in the first three weeks of this year (see M&C Saatchi shares lose 50% of their value in three weeks). Yet the euphoria was minimal. Admittedly the shares rose by 22% but the price remained at a very low multiple of historic earnings.
Post-tax profits earned for M&C Saatchi's shareholders in 2008 grew by 85% as the company reaped the rewards from owning the whole of cash generative Walker Media, boosted group revenues by 19% and benefitted from an eccentric accounting rule.
The reported profit for the year was £6 million after deducting minority interests, compared with £3.3 million in 2007. The improvement would have been much greater still if it had not been necessary to write off some of the goodwill included in the cost of past acquisitions. Total asset write-downs (including those relating to the group's under-performing Spanish associate) exceeded £4 million. Without them, the post-tax profit would have jumped by about £7 million.
However, £5 million of that profit improvement arose from an eccentric accounting rule relating to the notional cost of being subject to various "put" options by minority shareholders. Put another way, after excluding all these exceptional items, post-tax profits grew by about £2 million (or 28%).
Trading in the US has been difficult and the group is looking for opportunities to increase the scale of its operations there, presumably by acquisition. The performance of the brand consultancy Clear Ideas acquired in 2007 was also disappointing in the second half of 2008 as the declining economy prompted clients to cut back on this type of work.
These disappointments help to explain why the group's operating profit margin, while showing some improvement, remained below the 15% benchmark at about 13.2% before amortisation and impairment charges.
Nevertheless the group remained cash positive, despite paying out over £10 million in cash to acquire the balance of Walker Media and the deferred element due on buying Clear Ideas and Zapping.
With minimal future earnout obligations, the M&C Saatchi's balance sheet remains reasonably strong although its short term obligations exceeded its current assets by £8 million at 31 December.
As the company acknowledges, forecasting in the current environment is especially difficult and economic conditions are "tough". Certainly the stock market remains very cautious and it will take some time before the share price recovers to the glorious (and probably over-inflated) heights enjoyed in the summer of 2007.
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Aegis Group's decision to cut its headcount at a cost of around £40 million over two years has not only knocked profits and margins in 2008 but is not expected to pay for itself for at least two years.
It's a gamble that new chief executive John Napier believes is worth taking, given the "weaker market conditions" being experienced this year and the likelihood of further economic gloom in the years ahead. Napier may well argue - with some legitimacy - that future trading performance would have been much poorer unless tough action had been taken now, although he implies there was already too much fat in the business.
According to his review of operating performance Napier concluded that the staff cost savings were necessary "following years of continuing growth [and] a tendency to develop capacity in advance of revenue".
Without the severance and surplus property costs charged in 2008, Aegis would have reported a higher pre-tax profit of £152 million which compares with a pre-tax profit of £132 million in 2007.
Last year's profit was also dented by a write-down in the value of intellectual property and client relationships associated with recently acquired businesses. If more of the acquisition price had been allocated to conventional goodwill, it is conceivable that the write-down might have been lower.
Whatever view may be taken of that, this year's write down of £17 million compares with a modest £3 million in 2007. Without this charge and the severance costs, the pre-tax profit would have been £169 million compared with £135 million in 2007 - an increase of 25% in 2007. The group's operating profit margin would also have shown an improvement.
These exceptional charges in the 2008 accounts total £44 million and are doubtless properly and prudently computed. They also remove any risk of being attributed to John Napier's watch. And they may also enable Aegis to present a better picture of future prospects to potential acquirers.
Within about a year of being acquired by private equity house Vitruvian Partners in December 2007, digital search agency Latitude Group had appointed a new chief executive and parted company with three of its other four key executives - its founding chairman, its chief technology officer and its chief financial officer.
Last summer founding chief executive Dylan Thwaites handed over his role to a newcomer Alex Hoye and moved into the chairman's seat - but not for long. Thwaites departed in December 2008, one month after finance chief Julie Moran. Technology director Robert Shaw left in January this year, leaving only the chief operating officer Richard Gregory to survive the transition.
Vitruvian Partners has not disclosed how much it paid for its controlling stake in the business in December 2007 but according to the Liverpool Daily Post it was in the region of £55 million. Much of the proceeds were used to buy out two of the company's original backers. Initially Thwaites continued as chief executive and retained a sizeable stake.
Commenting at the time Thwaites said: "This is a fantastic development for Latitude and its clients. This will help us fund future expansion through acquisition and internal growth. We will be looking at new geographic markets and diversification into other digital marketing products including further development of social media and display advertising."
The reportedly high price paid by Vitruvian for its investment was attributed to expected rapid growth in 2007 and equally good prospects for 2008, but it soon became clear that the growth in comparable operating profit in 2007 was only 16%.
According to the financial statements for the year to 31 December 2007, the group earned an operating profit of £2.4 million before deducting the value of share-based benefits that accrued to employee shareholders. The highest paid director - presumably Dylan Thwaites - earned £500,000. In 2006 the operating profit had been £2.1 million.
Whether the company has continued to prosper is an open question. There have been several reports of redundancies and it is unusual for 75% of the management team to leave within a year of a private equity backer making its investment.
People have ceased to expect great things from Lord Bell's Chime Communications as its share price has lost some 95% of its value over the last eight years. But the situation is looking better.
The post-tax profit of £10.8 million earned for its shareholders in 2008 was up by 25% on the previous year. Its operating profit margin held good at a healthy 16.2%. And at the year end the group had net cash balances of £6.3 million - up from £812,000 at December 2007 - with minimal earnout commitments to meet in 2009. However, like WPP and Cello (see below) the group relies on its creditors for some of its working capital and that's not an ideal arrangement if business activity were to decline.
Of course nothing guarantees a safe passage through the economic storms now facing the sector, but at least a fairly strong balance sheet should help.
Meanwhile over at Cello Group, the picture was not quite so reassuring. Revenues were up by a little more than at Chime, but profits were down by 10% to £4.8 million after spending £1.3 million on redundancy and restructuring costs. Operating profit margins fell to 8.2% after amortisation charges or to 9.5% before such charges. Net borrowings at 31 December 2008 were £9.9 million and another £3 million will be paid out in cash as deferred consideration for acquisitions during 2009. Current liabilities exceeded current assets by £4.7 million - albeit a considerable improvement on the previous year.
Cello will be the first to point out that its results and profit margins are depressed by "non-cash" items arising from accounting rules it would probably wish it could ignore. These include notional interest charges on deferred acquisition costs and the value gained by employees who participate in share incentive schemes. But these accounting rules affect other companies too and they seem to suffer less from them. If Cello could earn better margins, the profit line would be transformed.
© Fintellect Ltd.
Why have shares in WPP Group and Aegis Group - the two biggest UK marketing services groups listed on the London stock exchange - been enjoying more price stability than many of their counterparts over the past month?
At Aegis it's easy to guess that speculation continues about a Havas bid or some other break-up deal under John Napier's new leadership. At WPP there seems to be more subtle activity in progress, namely a continuing buy-back of its own shares. Having first reported this on 10 March (see WPP share price helped by buyback of its own shares), further purchases have continued so that the group has now bought back nearly 2.5 million shares since it announced its 2008 results on 6 March at a cost of £9.5 million.
Is there a connection between the WPP activity and the speculation about Aegis? Have Sir Martin Sorrell and Vincent Bolloré been chatting with Merrill Lynch about a tripartite deal with Aegis? Is WPP shoring up its share price to ensure it can acquire the Aegis market research division Synovate and absorb it into its Kantar empire on the best possible terms (perhaps mainly by way of a share exchange rather than cash)? And would a Synovate deal with WPP make the rest of Aegis more appealing and digestible to Havas? It's all speculation of course, but Merrill Lynch hasn't been employed by Aegis for the fun of it and, in the present depressed state of the acquisition market, the investment bank will be eager to earn some fees.
Meanwhile we seem to be seeing signs of the stock market calming down as sound results from Chime Communications (see Chime sounds the right note) prompted a further share price rise. M&C Saatchi, Huntsworth and Optimisa have also seen significant share price improvements in the past month.
But not every company is enjoying a share price recovery. Cagney, Creston, Media Square and Mission Marketing Group all suffered further falls in excess of 10% during the past month1. Nevertheless, it is the first time for some months that the sector share price index2 has fallen less sharply than the FTSE All-Share Index.
1. Month to 12 March 2009; 2. MSFI Index
It may not bring a great deal of cheer to shareholders in Media Square to learn this morning that newspaper and periodical publisher Johnston Press has just announced a loss of £365 million for 2008 and total net borrowings of £477 million at 31 December 2008.
Johnston Press shares its non-executive chairman Roger Parry with Media Square and at least four other companies - and will do so until Parry steps down from Johnston Press in April after eight years in that chair.
"Johnston Press has faced the same difficult market conditions as other publishers", Parry said. "In addition, we entered the year with a relatively high level of debt, incurred as a result of earlier acquisitions, primarily in 2005. The board recognises and regrets that 2008 has been an especially painful year for our shareholders who have suffered a substantial loss in value."
Much of the loss arose from writing down the value of publishing companies and titles by £417 million, particularly in Ireland and Scotland.
Among a number of other Johnston board changes, John Fry succeeded Tim Bowdler as chief executive last December. Commenting on the current year's prospects Fry said: "In the short term there is little prospect of a turn in the advertising cycle and our expectation is for 2009 to be a very challenging year with revenues significantly below 2008 levels and only partially offset by lower costs."
Let's hope Parry's period of tenure at Media Square will bear better fruit for him and his shareholders.
WPP Group has bought back almost 1.5 million shares since it announced its results for 2008 last Friday (see Revenue up 20%, but profit down at WPP). The cost of the purchases was almost £6 million. WPP's share price was 374.25p immediately prior to publication of its results. Since then it has increased by 8% to reach 403.50p at the close of trading today (10 March)
Profits and margins at WPP Group actually fell last year despite achieving a 20% growth in revenues - by far the best growth rate achieved among the five global "majors" as predicted currency movements made a sizeable contribution (see WPP could benefit from currency windfall). Even after excluding the benefits of favourable currency movements, WPP showed the biggest revenue growth.
Apart from margin erosion, the main causes of WPP's profit setback were higher finance costs and higher taxation. Group post-tax profit fell very slightly to £513.9 million from £515.1 million reported in 2007, but after deducting the proportion of profit attributable to minority shareholders, the profit available to WPP's own shareholders fell by nearly 6% to £439.1 million from £465.9 million in 2007.
Operating profit margins before amortisation and asset impairment charges fell from 14.7% to 14.2%. After such charges, the margin dropped from 13% to 11.7%. Contributing to the decline was a £30.5 million write-down in the value of minority shareholdings in certain US and European businesses.
WPP's results include the impact of the acquisition of Taylor Nelson Sofres two months before the year end. As a result net debt rose to £3 billion at 31 December 2008 from £1.3 billion at 31 December 2007. Shareholders funds at 31 December 2008 were £6 billion. The group continues to rely on creditors to fund a small part of its working capital.
WPP expects revenues to fall slightly in 2009 and to rely increasingly on regions offering above-average growth prospects. Nevertheless, with WPP enjoying a full year's contribution from Taylor Nelson next year, Omnicom will have to work hard to retain its place as the world's biggest marketing services group.
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The Engine Group has been relatively subdued on the acquisition front in recent months, doubtless influenced by the economic uncertainty. And while the acquisition of three planners in the shape of Edwards Groom and Saunders may seem like a sudden renewal of activity, the nature of the deal suggests otherwise.
The deal terms have not been disclosed but reports say Engine has struck a "cash up front" deal with no earnout, although that does not preclude profit-sharing incentives being paid in the future. The trio made a profit of £197,000 before interest and tax in 2007 and, if that performance was repeated in 2008, it would be likely to command a purchase price in the region of £1.5 million. Add to that the accumulated profits to date and the price could reach £1.8 million. It is possible that the business made a bigger profit in 2008 than 2007, but unlikely that the increase would have been substantial, given the limited resources available to deliver it.
So while the business had been a nice little earner without recourse to material borrowings (up to December 2007 anyway), it seems unlikely that Peter Scott's welcome cheque exceeded £2 million - small beer when compared to most of his previous deals. It shouldn't take too long before the three equal beneficiaries have spent it.
Burst Media's game of playing hard to get entered a new phase today when it announced that it had rejected an unsolicited approach that valued the business at about $8 million (£5.5 million).
Given that Burst's shareholders' funds were reported to be a chunky $16 million last June and its cash balances amounted to $11 million at that time, it is not surprising that the offer has been rejected unanimously by the Burst board as "wholly inappropriate and unreflective of the worth of the Burst business".
Burst describes itself as a supplier of media, technology and professional services to online advertisers. Only six weeks ago the company announced that it had decided to stop looking for buyers and that it would be better to focus on "the ongoing development of the company" (see Burst strategy: We're for sale. No we're not).
Maybe that says more about the level of interest shown at a price anywhere near what the board had been hoping for, rather than about any genuine abandonment of its desire for a sale, particularly as the company says it will "continue to evaluate any appropriate approaches received" and has left open the door to its recent suitor in the hope that "the expression of interest may be revised". Meanwhile Burst has little choice but to focus on the ongoing development of the company and dream of better times.
Having failed to make an operating profit since admission to AIM in 2006 - something that will doubtless have influenced potential bidders - Burst's board is now hoping to report an operating profit for 2008.
According to preliminary figures announced yesterday, Havas increased its revenues for 2008 at a faster rate than its French arch-rival Publicis Groupe, although both were held back by adverse currency movements.
Havas revenues grew by 2.3% compared with 0.7% at Publicis. If currency movements had not dragged those figures down, Havas would have reported revenue growth of 6.7% and Publicis would have reported revenue growth of 5.7%.
Havas remains a minnow among the major global groups - its revenues were only about one third of those of Publicis. Improved operating profit margins of 12.1% were still behind those of Publicis (16.7%) or Omnicom Group (13%).
Something's going on at AIM listed market intelligence group Optimisa as the price of its shares jumped by 55% to 38p this morning, following the changing hands of 17% of the company's share capital at a price of 24.88p last Thursday.
Following this disclosure, Optimisa announced this afternoon that a Norwegian bank called Gimle Finans AS had acquired the 17% interest and that Octopus Investments had disposed of its shareholding in the company. The share price continued to rise, closing 84% higher at 45p.
Optimisa had a difficult year in 2008 after acquiring EQ Group in 2007. Group profits for the first half of 2008 were hit by the costs of absorbing that business as well as by the economic downturn.
Commenting on the half-year results last year chairman Ron Littleboy said: "Despite the expected continued difficult economic conditions in our mature markets the actions we have taken should result in a better performance in the second half in operating profits, profit before tax and earnings per share."
BOB WILLOTT
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