Do Huntsworth and Engine Group intend to merge?
As Huntsworth's half-year results were looming last week, and as the share price continued to flatline, one suspected the group would pull yet another rabbit from its top hat. Few predicted that rabbit would be Lord Chadlington himself.
Danny Rogers: the editor of PR Week
While it’s tempting to persevere with a "rabbit in the headlights" metaphor, it’s sufficient to say that the biggest group of British-based PR agencies has endured a torrid year.
The interim results yesterday confirmed an 8% slump in the revenues of its three main PR firms – Grayling, Citigate Dewe Rogerson and The Red Consultancy. Operating margins, while still respectable, were also down on the first half of last year.
As a result the share price has also been in the doldrums. Starting 2014 at 68p, the price had slumped by 40% last week, to 38p. And five years ago this was a group that could command close to £1 per share.
Back in June, at the company’s annual meeting, investors holding 30% of share – some of which bought in at £1 per share – expressed their anger with Chadlington by abstaining on his re-election to the board. And almost one quarter voted against last year’s remuneration report.
So as the interim results approached, Huntsworth was again under pressure to say or do something significant.
Initial reports on Sunday suggested Chadlington had been forced to announce his retirement yesterday, as a result of mounting shareholder unrest. But speaking to PRWeek yesterday the Tory peer denied this, claiming that he had decided on this action a year ago.
The reality, as ever, probably lies somewhere between these two poles. Chadlington, at 72 – and as a key adviser to David Cameron with a major election approaching – was no doubt considering a change in role. That said, the firm’s faltering fortunes presented much less wriggle-room for this restless and ambitious corporate animal.
During a previous share price slump five years ago Chadlington rationalised his agency portfolio, backing Grayling as a growing global network. But when this growth failed to materialise, just over a year ago he announced he was selling 20% of Huntsworth to Chinese marketing services firm BlueFocus.
The chairman that Huntsworth appointed back in May, Lord Myners, is another "big beast", a man with his own agenda and reputation to pursue. He has already been out and about privately briefing people about his vision for a global group.
So what next for Huntsworth? It doesn’t take a genius to realise that Chadlington’s retirement as CEO is far from an end to this story. Instead it could herald a dramatic new chapter for the group.
The priority is to find a new CEO, and quickly. This won’t be easy. There are very few candidates who command the respect of the City and have proven experience of running a global marketing services firm.
Equally any new candidate would find Chadlington breathing down their neck. The Lord intends to remain a senior adviser at Huntsworth. He has built the firm in his own image and he remains a major shareholder.
Once in place, this CEO would need to achieve real business growth in tricky circumstances. There has been a dearth of investment in the core networks over recent years and one suspects the current crop of shareholders have little appetite for seeing any further drop in their returns in the medium-term.
Indeed, one could argue that this has been the key problem for Huntsworth – there just hasn’t been much investment over the years.
So a more likely answer lies in a sale or merger.
It may be significant that this sudden flurry of activity at Huntsworth coincides with the sale of another UK-based group that is also struggling for global scale.
Two weeks ago Engine Group sold out to private equity firm Lake Capital, with Lake’s founder Terry Graunke becoming chairman.
Intriguingly Graunke is an independent director of Huntsworth. Lake became a major shareholder in Huntsworth in December 2009, when it sold it public policy firm, Dutko.
Could we be about to see some form of consolidation between Engine – which owns the large corporate and financial PR firm MHP and the consumer PR shop Mischief – and Huntsworth (with its similar portfolio)?
Certainly Engine, like Huntsworth, has failed to truly expand its power base beyond London to Asia Pacific or South America.
Huntsworth’s total revenues for 2013 were £171.7m with pre-tax profits of £20.1m. Engine is smaller, with total revenues of around £100m for 2013 and just over £13m EBITDA.
The key players in such a deal – Chadlington, Myners and Engine CEO Peter Scott – are Englishmen of a similar age and social network. Are they already in talks to this end? Graunke, on the other hand, is American and only 54, and is increasingly looking like the potential power broker.
To add further colour and conspiracy, one could throw Matthew Freud into the mix. Freud has just celebrated his 50th birthday and two weeks ago bought 3% of Huntsworth’s stock, for about £4m.
This looks more like a personal punt, however, and instead the fourth player that we should watch closely is BlueFocus CEO, Oscar Zhao, who joined the Huntsworth board after last year’s £36.5m investment and strategic alliance.
Yesterday Huntsworth applied the brakes on its increasing involvement with BlueFocus by saying it would wait until it has a new CEO in place before proceeding with plans for a Huntsworth/BlueFocus joint venture designed to acquire stakes in firms in growth markets.
However, the Chinese PR giant is enjoying the sort of growth that creates genuine and long-lasting power.
BlueFocus’ own fee income for 2013 is understood to be $124m, which is as much as 40% up year on year. Profits are close to $40m, 80% up.
At the beginning of this year Zhao snapped up British social media specialist, We Are Social, which was added to a litany of interesting acquisitions such as Singapore-based Financial PR Group and China’s Bojie Media ad agency.
With organic growth averaging 30% annually for the past 10 years, and 70% of revenues forecast to come from digital, it is difficult in the longer term to look past Zhao – still only 44 – as the leader to emerge from the next generation of "PR titans".
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