Agency ownership: Public Vs Private
As Lord Bell attempts to take Bell Pottinger back into private ownership, Alec Mattinson looks at whether agency appetite for a market listing is a thing of the past.
Ownership: is agency appetite for a market listing a thing of the past?
One of the UK's largest PR businesses going private is noteworthy; two ditching the public markets looks like a trend.
Less than a year ago, Matthew Freud regained control of his agency Freud Communications, taking it back privately from Publicis. All signs now point to him being joined by Lord Bell, who seems increasingly likely to lead a deal to spin Bell Pottinger out of Chime Communications.
At the time of going to press nothing had been confirmed, but a number of sources told PRWeek that they expected a deal to be reached - with one insider rem-arking that negotiations are sufficiently advanced that it 'almost can't not happen'.
Freud and (potentially) Bell Pottinger mirror US firms MWW Group and Brodeur in buying back their independence at a time when the share price of listed marcoms groups have come under severe pressure.
The goliaths of the marcoms world will justifiably feel more comfortable about their positions - on 1 March WPP announced pre-tax profits that burst through the £1bn barrier for the first time.
But at a time when the comms industry in general is weathering the recession in reasonable shape, the small and mid- cap listed comms holding companies have taken a buffeting from investors. The share price of Chime and Huntsworth, for example, dropped by 45 per cent and 59 per cent respectively in the second half of 2011 on the back of profit warnings, before regaining some ground since January.
The advertising-centric marcoms groups found life hard going at the beginning of 2009, but largely they have suffered less volatility than businesses that have a larger chunk of income from PR.
Adam Parker, chief executive of RealWire, suggests investors may struggle to value PR businesses. 'It's easier for investors to understand marketing and advertising as at their core, as they are essentially buying and selling things,' he says. 'I wonder if the average punter understands PR as an area of service. Given the small volume of trading in mid-cap stocks, it does not take much activity to substantially change the share price.'
One would forgive investors for being somewhat wary of comms-centric listed firms. Since listings began in earnest in the mid-1980s, the sector has had a chequered history, the latest casualty being Smarts owner Media Square, which went into administration in December before being taken private by MSQ Partners.
An added pressure is that the UK PR marketplace has become increasingly crowded and competitive in recent years. Many industry observers argue that this has led to a situation where agencies either need to be small and highly focused niche players or find ways to grow into a larger, global business.
Huntsworth Group CEO Lord Chadlington says: 'You have either got to be a very niche player with a small market cap and huge growth prospects, or a big firm that investors believe can manage the vagaries of the marketplace. This is true of every sector.'
The need to grow internationally and move into new markets has become a constant driver across almost all PR businesses, but raising capital to underpin this expansion has rarely been more difficult.
'Even large groups are struggling to access capital in this bear market - for mid-cap quoted businesses finding access is incredibly difficult,' one agency network MD notes. Another international agency boss argues that listed firms are only equipped for this process if they are supported by an upward share price: 'The moment the share price is stationary or goes down, you can't do deals and before you know it the management is under water.'
Some of the travails of the public markets help explain why Freud and Bell see private ownership as a preferable model, particularly as private equity has significantly returned to the comms industry.
Late last year, international business consultancy College Group penned a deal to sell a minority stake to Vitruvian Partners, while in October 2010 H.I.G. Capital made a £62.5m investment in MHP-owner Engine Group, after Engine scrapped its proposed public listing.
Richard Nichols, chief executive of College Group, explains: 'We were at a point where we wanted to accelerate our growth and needed greater access to capital. We felt by far the most attractive option was to work alongside a strategic partner that saw a medium-term growth story.'
Nichols was one of the drivers behind former Citigate-owner Incepta's rise into the FTSE 250 as a publicly listed company in the late 1990s. But he feels Financial Dynamics' (now FTI Consulting) successful experience with private equity owner Advent is a more relevant blueprint to follow in the current market.
Will Whitehorn, chairman of Loewy Group, which itself was pursuing a private-equity-backed buy, build and float model before the recession took hold, agrees: 'Private equity is back with an appetite for these businesses, and at the moment private is an easier route than public.'
Loewy, which was last year bought by private media investment company Writtle Holdings, like many of its contemporaries was suffocated by debt through over-rapid growth. Whitehorn points to the more measured and sector-specific growth of his former firm Next Fifteen as an example of the new model to follow for both listed and private firms.
'The industry lost a bit of discipline in 2005/06,' explains Whitehorn. 'Debt was cheap and private equity was snapping up comms businesses at prices public firms could not justify. Private equity is probably in a better place now, and with the froth now out of the market you will see a lot more investment in the sector.'
As well as the sometimes onerous regulatory and transparency requirements of a listed firm - not to mention the significant costs associated with floats - being subject to the whims of public investors means that listed groups sometimes have to necessarily take short-term views to deal with short-term issues.
Supporters of the private investor model argue that the typically three-to-five-year timescale of private equity investors means that a business can take a long-term, strategic view of growth.
MARATHON NOT SPRINT
Lord Chadlington acknowledges that private equity is 'very much more willing to invest in people businesses than it was when I started Huntsworth years ago', but stresses that when private equity wants an exit it leaves the company facing a trade sale or float in any case.
He remains a passionate defender of the listed holding group model: 'We have tried very hard to launch a completely new brand on a global basis and have been hammered by the stock market.
'But I could never have built a business up to almost £200m in fees as a private company. Am I doing better work than I could have done as a private company? You bet your bottom dollar... This isn't a sprint, it's a marathon and you have to keep on working in the best interests of shareholders at all times.'
David Wright, the former Incepta chief, is one of the few to take the public route to build a new marcoms business in recent years. He launched Porta Communications on the AIM market in late 2010 and is hoping to oversee the growth of Newgate Public Relations into a major international brand.
'I genuinely believe that it is more advantageous to have a stock exchange listing than to be a private company,' he says. 'Why would an individual who has run a successful business give up the ownership of their company to another private company?... Having a quoted stock enables us to get these deals done.'
Porta's share price has fallen 74 per since its early 2010 high, but Wright says the share price will not stop the group's growth, only slow it down: 'I'm talking to firms that will come in at 10p - they all see our shares are artificially depressed.
I believe we will take the market by storm during the next few years.'
INDUSTRY AT CROSSROADS
Whatever the eventual result of the ongoing talks at Chime, Lord Bell seems likely to depart the organisation with which he has become so intrinsically linked, and a sale of Bell Pottinger would also call into question Chime's commitment to the comms industry. Significant Chime shareholder WPP is likely to have a strong input into the future of the group.
Added to that, key individuals who have dominated UK PR for two decades will surely begin to take a more 'hands off' approach as they enter the final phase of their careers.
All this paints an industry at a crossroads - a situation it has faced and emerged from in stronger shape after recessionary times in the past. Few, though, predict new listed entities emerging from the comms space for the foreseeable future, even if the wider new listing market loosens.
The industry's appetite to raise public money to pursue a buy-and-build strategy has all but evaporated and it may be a while before it returns.
VITAL STATISTICS - FIVE LISTED PR GROUPS
Current share price 227p*
52-week high 302p (1 Jun 11)
52-week low 163p (16 Dec 11)
Market cap £191m
CEO Lord Bell
Chime, which owns PR firms Bell Pottinger, Good Relations, and Harvard among others, announced in November it was to cut costs after losing lucrative US government contracts. Lord Bell and Piers Pottinger were announced to be exploring buying back portions of Chime's PR business in February.
Current share price 46.8p*
52-week high 76.9p (2 Mar 11)
52-week low 31.8p (12 Jan 12)
Market cap £111m
CEO Lord Chadlington
A November interim statement revealed the cancellation of more than £4m of client project fees. The group has reorganised its business into four divisions; Citigate Dewe Rogerson, Grayling, Huntsworth Health and Red. Chadlington says Huntsworth should remain independent and listed.
Current share price 6.9p*
52-week high 24p (2 Mar 11)
52-week low 5.5p (24 Feb 12)
Market cap £4.7m
CEO David Wright
Wright launched Porta in 2010, taking over AIM-listed TSE Group and raising £2.75m for acquisitions to build a marcoms group. The group plans to build Newgate Public Relations into an 'international consultancy' and has recently bought financial PR businesses Threadneedle and Hansard Communications.
Current share price 61p*
52-week high 122p (8 Jun 11)
52-week low 46.5p (30 Jan 12)
Market cap £36.9m
CEO Don Elgie
Creston, the owner of Nelson Bostock Communications and Red Door Communications, has said it is looking to reduce costs. Despite announcing Q3 growth, in January the group said it had experienced a 'shortfall in Q4 new business' and that it would attempt to 'align operating costs to the lower sales levels'.
Current share price 824p*
52-week high 845p (3 Mar 11)
52-week low 561.5p (9 Aug 11)
Market cap £10.4bn
CEO Sir Martin Sorrell
WPP recorded record pre-tax profits of more than £1bn last year, a rise of 18 per cent on 2010, on revenues of more than £10bn. The group's public relations and public affairs businesses had full-year growth of 6.2 per cent, with like-for-like revenues up 4.6 per cent.
This article was first published on prweek.com
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