Cash-stretched Deal Group Media, the AIM-listed digital advertising sales group, is paying a very high price to raise £500,000 from River Don, a company controlled by former chairman John Porter. Interest will be payable at 15% on redemption of the loan which will be secured on Deal Group's shareholdings in two associated companies.
The loan may be redeemed by either party at one month's notice at any time after the expiry of the first year. Alternatively the loan may be converted into Deal Group shares. The loan is subject to approval by Deal Group's shareholders at its forthcoming annual meeting.
Last month Deal Group published disappointing results for 2008 (see Deal Group increases revenues...and losses) and chairman David Lees admitted that in the current year "a key focus is to achieve a positive trading cash flow at the earliest opportunity".
John Porter owns 75% of River Don, a company engaged in air freight transport through its controlling interest in Global Supply Systems based at Stansted airport. Porter left the board of Global last month. The remaining 25% shareholding in River Don is owned by the Swedish low cost airline Flyme Europe. The River Don group made a pre-tax profit of nearly £1 million in 2007.
© Fintellect Ltd
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It was only a matter of time before an old trick perfected by public company executives came back into popularity when the stock market took a tumble. And executives at Ebiquity seem to be the first in the marketing services sector to have performed it this time.
Shortly after Mike Greenlees and Nick Manning took over the management of what was then Thomson Intermedia, the company granted them share options with an exercise price of 84p and 88p respectively. That was in October 2007. Today the company's shares are quoted at 32.50p and - guess what - Ebiquity's board, supported by its remuneration committee, has approved the granting of replacement options at 35p.
It's a neat trick. Other investors have to live with the knowledge that share prices can go down as well as up, but some executive option holders are able to avoid the downside simply by scrapping their entitlement and replacing it with another at a lower exercise price. Where's the incentive in that? Answers to this blog please.
The Mission Marketing Group has successfully completed negotiations with its bankers and former shareholders of acquired companies on the restructuring of its borrowings (see Mission facing funding challenge), but will be paying its bankers fees that will wipe out the expected cash flow benefit of its restructuring.
The price for renegotiating its bank facilities will be a fee of up to £1 million in return for which Mission believes it has reduced its acquisition obligations payable in cash or loan notes by about £900,000.
Mission's directors believe the restructuring of its financial obligations to bankers and former shareholders "will ensure appropriate working capital is available for the group going forward".
Mission made no comment on how, if at all, the terms of its bank facilities may have been amended although it acknowledged that it has renegotiated the repayment profile. The company also acknowledged that, since publishing its 2008 accounts, it has had to modify the way in which it had expected to settle some of its short-term obligations to former shareholders in companies it has acquired.
Of the acquisition obligations of £7.3 million due for settlement within one year, the company had assumed that £4.7 million would be payable in cash or loan notes convertible into cash at a subsequent date. However, Mission has now agreed to increase by £1 million the portion of the short-term obligations to former shareholders in Bray Leino payable in cash or loan notes - increasing the total short-term obligation in cash or loan notes to £5.7 million - and has reduced the share component of the Bray Leino obligation from £2.5 million to £1.5 million. Presumably those former shareholders were reluctant to take as many shares as had previously been assumed.
In a review conducted by Fintellect last year and published in Marketing Services Financial Intelligence, Mission was one of the three listed companies in the sector that appeared to have the most vulnerable balance sheets at that time. The others were Taylor Nelson Sofres (now acquired by WPP) and Cagney. Since then Mission has raised an extra £1 million of share capital (less costs) as well as restructured its financial obligations.
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Today's announcement by Next Fifteen Communications Group that it has decided to end bid discussions with both potential suitors - Huntsworth and Chime Communications - begs the simple question "why?"
Next Fifteen says talks never got close to a deal and no due diligence investigations were carried out. So it would seem more likely that the parties could not agree on even the basics of an offer, whether that was price, strategic direction, future management roles or anything else.
Were the potential bidders trying to take advantage of Next Fifteen's depressed market value, exacerbated by its recent loss on currency hedging contracts (see Next Fifteen share price jumps on bid talk)? Or had Next Fifteen's management been approached by potential private equity investors and wanted to test other options to see whether it could get a better price from a sale today, rather than simply trading on through the recession? Time may - or may not - tell.
Chime confirmed today that it has no current intention of making an offer for Next Fifteen and, as its proposition would almost certainly have been in the form of a share exchange, it probably would not have excited a potential seller in the current market conditions anyway. Huntsworth's intentions still remain somewhat unclear.
The Next Fifteen share price lost 16% of its value today, suggesting that its shareholders are not expecting a sudden resurgence of bid talks. And shareholders in Chime and Huntsworth showed no obvious sign of disappointment either.
Somewhat surprisingly the resolution to reappoint chairman and interim chief executive John Napier as a director of Aegis Group had more votes cast against it than any of the other nine resolutions put to the shareholders at today's AGM. In total 22,011,926 votes were cast against.
No obvious reason for the negative voting was apparent and Napier still enjoyed the support of almost 73% of shareholders eligible to vote.
The hiring of a senior General Motors Corporation executive to coordinate all Interpublic agency services to the troubled US motor manufacturer, announced today, has all the signs of a pre-emptive move to maximise the prospect of retaining the GM relationship following its anticipated bankruptcy in a few weeks' time.
The new hiring is 56 year old Martin Walsh. During his 33 year career at GM he has held senior marketing positions as well as performed more general management roles. He will report directly to Interpublic's chief executive Michael Roth.
Observers expect GM to sell off a controlling interest in its European operations within the next week or two and then to seek protection from its remaining creditors by filing for bankruptcy. If this happens, Interpublic risks not only the non-payment of outstanding debts but also the appointment of competitor agencies to service the successor business. By hiring an influential GM executive Interpublic's Roth is clearly doing everything possible to retain as much of the GM business as possible.
Last week Interpublic secured protection from any precipitate action by its bankers in the event that it is hit by big GM bad debts that would otherwise threaten its own solvency (see IPG negotiates protective deal with bankers in case GM collapses).
At its annual meeting today Cello Group chairman Allan Rich confirmed that results for the half year to 30 June are expected to reflect a slowdown in client activity. The outcome will almost inevitably be a decline in profit by comparison with the same period last year. The company's share price lost 10% of its value after the announcement.
Rich told shareholders that the group remained "cautiously optimistic for a solid full year outcome". He said the group had performed "solidly" in the first quarter of 2009 and continued to manage its cost base carefully. Operations are being consolidated into single office hubs to reduce overheads.
The Interpublic Group of Companies has secured an agreement with its principal bankers to exclude from its borrowing covenants the impact of the feared bankruptcy of General Motors Corporation on Interpublic's profit before interest, tax, depreciation and amortisation (EBITDA).
The agreement reflects concerns that Interpublic agencies working on GM business may suffer bad debts if the giant motor manufacturer collapses. This in turn could have caused Interpublic to breach one or more of the profitability conditions agreed with its bankers for maintaining its current borrowing facilities.
The protection obtained by Interpublic relates both to bad debts and other adverse consequences arising from a GM bankruptcy. It is limited to a maximum aggregate cash cost of $150 million and a further non-cash cost of $100 million. Non-cash costs are likely to include any goodwill write-offs.
The deal was struck last Wednesday 13 May "solely as a matter of sound financial management", Interpublic said, and not as a result of any non-public information concerning any GM-related bankruptcy proceedings.
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This morning's statement from Aegis Group's new chief executive John Napier about prospects for 2009 seems somewhat ambiguous. After admitting that revenues experienced an 11.6% organic decline in the first quarter by comparison with a very strong quarter in 2008, he said: "Our target remains to broadly maintain the full year underlying profit margins through continuing careful management of the business."
So does Napier expect to achieve a profit for the full year that is better or worse than 2008? If revenues slide and margins are maintained, that will still result in a lower profit. Napier predicted today that recent new business wins should offset the impact of previously announced losses for the rest of the year, but this takes no account of the possibility that more client losses may occur or that revenues may not hold up on existing business. Fortunately the first quarter results were boosted by favourable currency exchange rate gains that more than offset the organic revenue slippage and Aegis may be hoping that such gains will be sufficient to offset any further decline in organic performance.
In March this year Napier said the management had "positioned the group appropriately" and expected to produce a "resilient performance in more difficult markets in 2009" (see Aegis new broom sweeps clean). Today he said the outlook remains unchanged. Nevertheless the interpretation of a "resilient performance" looks more likely than not to mean a profit decline before taking account of any exceptional or non-recurring items. The stock market seemed to take that view as the Aegis share price lost 10% of its value in early trading, but later in the day Napier displayed greater confidence by forking out £82,250 to acquire 100,000 shares himself.
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Shares in AIM-listed Cagney fell another 29% today when the company announced the end of talks with an unnamed suitor that might have resulted in a takeover bid. Cagney's shares had already lost much of the £7 value at which they were listed in March 2006, wallowing at just 70p this morning before the announcement. When the stock market closed this evening the price stood at 50p.
A statement from Cagney said that both parties had agreed that in the present economic conditions their energies would be better directed towards consolidating their present business and ensuring financial robustness in the face of the continuing recession.
Steve Mattey took over as Cagney's chief executive last year after founder Paul Simons left.
There's always something interesting to find in WPP's high quality and informative annual report. One of this year's snippets is the fact that the group would have made less operating profit if it had owned Taylor Nelson Sofres and various other acquisitions for the whole of 2008 instead of just for a few weeks. By implication it bought a basket of loss-makers last year.
Another snippet is the fact that the biggest contributor to the growth in shareholders' funds last year was not the £439 million profit retained from trading but a £1.3 billion benefit from exchange rate movements affecting its net assets, principally the highly intangible assets of goodwill and brand names like Young & Rubicam Group, Ogilvy & Mather Worldwide, JWT and Hill & Knowlton. Remember that foreign currency values can go down as well as up.
While on the subject of goodwill, the annual report reveals a curious approach to assessing whether the £330 million cost of acquiring 24/7 Real Media in 2007 has suffered any impairment. It may have done, but WPP says it decided to review the value of goodwill attributed to 24/7 against the net present value of future cash flows expected to be earned from the entire "advertising and media investment management" segment of its business. In other words, 24/7 has been lumped together with WPP's traditional media buying and planning business when reviewing the need for an impairment provision. The justification? WPP says 24/7 "significantly enhances the group's digital capability and has made a major contribution to winning new business for the group".
But is 24/7 alone expected to generate the scale of projected cash flows from future profits that would justify the £330 million cost? That purchase price was roughly equivalent to a multiple of 44 times the internal cash flow being generated by the 24/7 business prior to acquisition, although it actually had incurred a post-tax loss after taking account of non-cash items like depreciation and share-based incentive schemes, as well as restructuring costs. Answers to this Blog please.
Shares in monitored marketing services companies listed on the UK stock market rose by 22.5% in the month to 12 May while the FTSE All-Share Index recovered far more gently (see chart). The industry's MSFI Index rose to 26.8 (January 2001 = 100) from 21.9 on 12 April and an all-time low of 20.8 on 12 March.
Among the big risers was property marketing specialist Adventis Group - up 87% after UBS acquired a 5.8% shareholding in the name of Apollo Nominees on 27 March. Private equity house ISIS EP already held 8.06% of the capital through Chase Nominees.
Creston also staged an 81% recovery and Media Square shares doubled their depressed price to a still depressed price after Yorkshire entrepreneur Anthony Gill took a stake. Next Fifteen Communications Group's shares jumped 85%, helped by news of bid approaches last weekend.
Only Cagney, Digital Marketing Group and Ten Alps suffered share price setbacks in the period, albeit the falls were modest.
Information gleaned from its newly published accounts suggests that M&C Saatchi's recent attempts to acquire companies have been less successful than anticipated and explain its apparent reversion to its past preference for backing individuals or start-ups where suitable opportunities arise.
In addition to writing down the value of acquisitions in last year's accounts by about £4.8 million, the group has reduced its original estimate of the £30 million total purchase price of brand consultancy Clear Ideas by the unpaid portion of £9 million which would have been perfomance-based. The group has abandoned its plan to build a bigger stake in its Spanish business Zapping/M&C Saatchi - at least for the time being - after having to write down the cost of its 25% investment by £2.4 million. Smaller write-offs have been made in other territories.
"While our model of organically building new businesses is slower to develop than acquisitions, it can be financed out of operating cash flows and allows us to keep group overheads low", said chief executive David Kershaw.
Despite the write-offs relating to recent acquisition disappointments, M&C Saatchi reported a 48% growth in post-tax profit for 2008 (or 85% if profits attributable to minority interests are excluded). Admittedly this improvement was greatly helped by the £1.9 million reversal of some of the charge made in the previous year in respect of the increased value placed on put options that minority shareholders in subsidiaries may elect to exercise in due course - a bizarre accounting rule that achieves little other than a serious distortion of reported profits. Without the benefit of that accounting quirk, post-tax profits actually fell by 20%.
If nothing else, the acquisition of Clear Ideas has given the M&C Saatchi board a clearer idea about the best growth strategy.
Shares in AIM-list public relations company Next Fifteen Communications Group jumped 20% this morning as it confirmed it is in talks with two of its rivals about a potential bid. Huntsworth owned up immediately as one of the bidders although the other suitor - Chime Communications - took until lunchtime to acknowledge its involvement. A week or so ago Chime denied it was in any talks when the recent rapid rise in its share price was highlighted in this Blog (see Chime's share price tripled since January).
Next Fifteen has a heavy involvement in the technology sector and is much smaller than either of its potential bidders. It emphasised that the talks did not mean that any offer would necessarily emerge.
Today's price rise placed a market value on Next Fifteen in excess of £28 million - equivalent to a multiple of 15 times its prospective profits after tax for the current year before any adjustment. Those profits are expected to be depressed both by the economy and by a £2.6 million loss arising on currency hedging contracts (see Currency hedging contracts to lop £2.6m off Next Fifteen profit), although they are projected to rebound again in 2010.
The bid approaches were probably spurred by the knowledge that Next Fifteen's current performance is being depressed by those exceptional items. Chief executive Tim Dyson owns over 10% of the company and may be reluctant to sell during a recession unless those elements are excluded from the valuation so that the price is sufficiently appealing.
If the company can recover to its 2008 level of performance in 2010 - when the currency loss will be behind it and the economy should be moving forward - the current market value of its shares would represent a multiple of only 8.
Neither Huntsworth nor Chime are heavily borrowed relative to the size of their shareholders' funds. Huntsworth is rumoured to be contemplating a cash deal (possibly with a share component too) while Chime is said to be thinking in terms of an all-share transaction. On the surface Chime is the smaller player and may be nervous about borrowing a big chunk of cash in the current climate, despite having no borrowings at present. Huntsworth appears to be the bigger and stronger bidder, although it does have some debt already and is possibly at greater risk of suffering a future write-down in asset values if the recession continues for too long.
Dentsu, Japan's biggest publicly listed marketing group, today confirmed this Blog's earlier prediction (see Massive investment write-down expected to wipe out Dentsu profit) and the market's worst fears as it announced that it expects to have incurred a loss of £126 million (¥20,453m) for the year ended 31 March 2009.
The loss was caused by massive £313 million (¥51,000m) write-downs in the value of its investments. Dentsu warned of the investment write-downs in March but at that time gave no further indication of their impact on previously projected year-end profits.
BOB WILLOTT
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