Sectors: Creative, Media & Technology

The Sorrell-helmed holding company’s latest trading update contains little cause for optimism. What does it tell us about the health of the sector at large? Client caution in the face of adverse economic weather will likely persist over the next 12 months, according to Sir Martin Sorrell, executive chairman of Media.Monks parent firm S4 Capital. The agency boss said “we are not expecting 2024 to show macro-economic improvement” in a trading update concerning the company’s commercial performance in the fourth quarter of 2023. Though the company said results were in line with expectations, the update counters some of the optimism expressed by UK ad industry figures, including the IPA’s director general, Paul Bainsfair. “After four years of very strong growth, 2023 was a difficult year impacted by volatile macro conditions and, consequently, cautious spending from clients, particularly those in the technology sector and from smaller project-based assignments,” Sorrell said in a statement. The company said it expects like-for-like annual net revenue to fall 4% and for its operating profit margin to hover around 10-11%. The margin rose on the back of “significant cost reductions” which included hundreds of layoffs earlier last year. Whether or not S4’s Q4 performance will be mirrored by its sector peers is an open question. The fourth quarter of the year is typically lucrative for agencies as clients spend the cash left in their budgets. A recent trading update issued by Mission Group, a smaller British agency network listed on the AIM exchange, bore this out – after issuing a profit warning because of “challenging” commercial performance earlier in 2023, its trading “significantly improved” in the final quarter. The lift available to agencies may only be a small mercy, however. 2023 saw advertisers slash marketing budgets, leaving little scope for commercial growth for agency businesses. “For a significant majority, Q4 was tough,” says Barry Dudley, a partner at advisory firm Green Square. “Q4 was a combination of the cost of living, interest rates, the works. Clients just sat on their hands. But conversations seem to be opening up.” Last week’s IPA Bellwether, a quarterly survey of advertiser confidence, suggested that brand advertisers would look to increase spending on marketing activity over the next few weeks. “This quarter’s upbeat Bellwether findings show that companies are heeding the evidence that continuing to advertise through the tough times can help maintain brand loyalty and protect the long-term health of their brands,” said Bainsfair. “Optimism for this year is high, but there’s nervousness for elections and wars,” adds Dudley. But S4’s client profile – the company prefers to work with tech clients and large multinational advertisers it terms “whoppers” – means that increased spending by British household names is unlikely to provide much benefit. ‘A maelstrom of uncertainty’: My CES chat with Sorrell became an agency survival guide S4’s revenues were hit when technology clients began cutting marketing spend last year. And its ‘tall’ market offering, which eschews additional sectors included in bigger holding company portfolios such as PR or healthcare, means that the company has proven vulnerable to the whims of the US tech industry. “They don’t have that balance of other services at S4,” says Dudley. Sorrell suggested 2024 would not bring a radical change in circumstances for the firm. “While it is early in the year, we are not expecting 2024 to show macro-economic improvement, and client caution on marketing spend will likely persist, although not at last year’s level given interest rates are likely to fall over time,” he said. Given those conditions, Media.Monks’ content pillar, which broadly covers creative and production, had the most scope for growth, he added. “Initial indications are for an improvement in performance in the Content practice, reflecting cost reductions, broadly similar performance in Data & Digital Media to last year and a more challenging outlook for Technology Services. In these unpredictable times, we are focused on positioning the Company for medium-term growth, improving profitability and returning funds to shareowners.” The latter point is an important one for S4 Capital. Its growth strategy in previous years centered on a seductive M&A approach that offered cash-and-share deals to founders. The strategy paid off, and it was able to add companies such as MightyHive, XX Artists and TheoremOne. Now, S4’s share price is considered to be underweight. If it’s to return to its strategic growth plan and fulfil Sorrell’s medium and long-term ambitions it will need to keep shareholders onside and hope its price rises once more. Read more

Some thoughts from a conversation with our partner Barry Dudley and host Peter Lang on getting your business into shape generally and with an eye on maybe doing a deal in the future. I’d skip the first 7.5 minutes where they chat about Barry’s career, but then they discuss: 7:30 Why having strong numbers gives freedom for creativity, innovation, people development 11:30 Simple and timely monthly reporting and a handful of KPI’s 18:30 When is the right time to bring in a CFO 21:00 Getting your numbers into shape, with normalisations, to then look towards a value realisation event 32:00 What makes a good deal – it’s not just about the numbers – and changing deal structures On You Tube Or Spotify

French media company Vivendi’s announcement that it’s exploring a sale of Havas—as well as sister company Canal+ Group and stakes in publisher Lagardère and Telecom Italia—could unlock more value for the agency, making it attractive to potential buyers, sources tell Adweek. The potential sale follows the partial sale of record label Universal Music Group (UMG) in 2020, when 10% was acquired by a consortium led by Chinese media company Tencent. Since the listing of UMG, Vivendi has seen a substantially reduced valuation, meaning growth for its subsidiary companies has been limited. “In 2020, Havas was a mere 15% of Vivendi’s revenues, with UMG and Canal+ dominating the numbers and holding center stage,” said Green Square partner Barry Dudley. “When Universal was spun out in 2021, Havas shifted toward the limelight at just under 30% of revenues. If the next step is a stock exchange listing all to itself, Havas will suddenly be putting on its own show.” In the six years since Vivendi acquired the remaining 59.2% stake in the advertising agency held by the Bolloré Group, the ad industry has gone through a fairly tumultuous period of change, as client demand for digital transformation strategies and the advancement of artificial intelligence have disrupted the commercial creative sector.

Unlocking value for future owners

Havas is the fifth-largest communications agency network globally and has been led by chairman and chief executive Yannick Bolloré for the last decade. He also serves as chairman of the board at Vivendi. “If it is to unlock the additional value that is being held back within Vivendi, it is going to need to be quickly communicating a very clear and purposeful strategy,” Dudley explained. Adweek understands that on Friday, a meeting was held with leadership within Havas to reassure them over concerns that arose from the surprise company announcement. Further speculation has indicated that Havas could become a takeover target to merge with a rival agency network group, or potentially a consultancy such as Deloitte or Accenture looking to improve its creative and media credentials. According to Vivendi’s third-quarter results, released in October, Havas’ net revenue was $714 million (654 million euros), with organic growth year-over-year of 4.5%. That followed second-quarter organic growth of 6.3%. “[Havas] is also a relatively unprofitable, complicated and unwieldy part of the group. They are undersize in the U.S. and in media,” said one former Havas executive who requested anonymity. “And, despite what the release says, they have been very reluctant to make big acquisitions—Havas and [Vivendi] will never get scale without that.”

Ownership, acquisitions and agency structure

It is thought that even with going public, the Bolloré family would continue to run the businesses outside of Vivendi’s direct ownership. Dudley explained that the agency network’s media business is its main revenue driver, despite Havas owning 148 agencies worldwide, including agency network BETC. These are based across its 73 “villages.” This could lead to Havas following the WPP strategy of consolidating agencies to simplify the structure for clients. Former Dentsu International and WPP executive Euan Jarvie, who now acts as chairman, investor and adviser for companies, believes that the major holding companies still have transformational challenges in their structures with the rise of consultancies entering the ad market, making driving scale even tougher. “The next few years will [see] a rise of more indies and much more of a struggle for large corporates in and outside the ad market,” Jarvie said. “There is still lots of money in the markets for equity of capital investors to get into this space. “All industries disrupt themselves generationally or evolutionary from time to time,” Jarvie added. “Advertising is doing both, so now might be a great time for Vivendi to consolidate and get value back in from some of its assets.” Dudley added that the business will already be looking for its next high-profile acquisition deal following that of creative agency Uncommon earlier this year, with an eye on either Asia or the Americas. “One thing is for sure: Doing deals is going to be fundamental in the mid-term,” Dudley said. Read more