Sectors: Creative, Media & Technology

An Independent Havas Could Lead to Structural Changes and Acquisitions. Barry Dudley quoted in Adweek

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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

The 7 key drivers of financial value for agencies. What do you need to get right? Tony Walford’s insightful Futerview podcast

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Have you ever wondered about the best key criteria to build, value, and potentially sell your agency? A lot of the answers are here in less than 50 minutes! Tony Walford shares advice and perspective in Henry Piney’s great Futureview podcast, talking about the importance of insights. A few other moments you may find interesting:       20.58: How Green Square operates 23.25: What acquirers are looking for 29.24: Learnings from the Pandemic 31.26: Hot trends over the years 34.31: PE vs strategic acquirers 39.18: What is going on in the market and where it is going to go https://open.spotify.com/episode/5nCOktHBvBofo5jLXvYgG2

Job losses indicate S4 Capital ‘not a business that can say it’s growing’ Barry Dudley quoted in The Drum

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The firm recorded negative net revenue growth for the year to date – and signaled more job losses are due in the coming months. Falling revenues and ongoing staff layoffs at S4 Capital, the company behind challenger agency network Media.Monks, reveal how acutely one of the highest-profile businesses in advertising has been stung by lower technology client spending.

Revenues at the group fell 15.4% in the third quarter of 2023, the firm’s financial results reveal. Like-for-like revenues were down 10% in the same period, while like-for-like year-to-date net revenue growth fell 0.3%. S4 has already issued two profit warnings earlier this year after initial commercial results suggested it would overcome 2022’s setbacks. Tech clients currently account for 43% of S4’s revenue, but “continued client caution to commit and extended sales cycles, particularly for larger projects,” according to executive chairman Sir Martin Sorrell, continued to hold down growth at the firm. In response, the company emphasized a continuing “drive for efficiency,” which has included a “significant reduction in headcount”: its overall workforce fell 4% in the last three months and 9% since June of last year, equivalent to around 850 job losses. The losses “reflect the progress that has been made on aligning our cost base to demand we are seeing from our clients,” a statement to the market read. According to chief financial officer Mary Basterfield, more job cuts are due in the fourth quarter of the year. “It’s probably not appropriate for me to comment publicly on specifics and exact numbers. But we will expect to see a noticeable benefit on our cost base as we go into 2024,” she said. The layoffs mean the company must now find future growth with fewer staffers to service its clients. “Losing people and the word ‘progress’ shouldn’t be in the same sentence in this industry. That’s not a business that can say it’s growing,” Barry Dudley, partner at Green Square, tells The Drum. In the short-term, attention to the company’s margins and cost base is intended to increase shareholder confidence. “It’s what they’ve got to do for the markets, unfortunately – taking action, cutting costs,” explains Dudley. So, too, are promises of cash earmarked for share buybacks and shareholder dividends next year. S4’s strategy of offering cash-and-share deals to the owner of agencies it acquires (and it was previously highly acquisitive) means that its ability to pursue future deals rests upon the value of its shares. Rival holding companies such as WPP or Omnicom, for example, typically buy new companies with cash. “They’re saying: we’re looking after the shareholders here and we’re not going to pile into more deals until things have turned around a little bit,” Dudley adds. The company hopes that the fourth quarter will bring it some relief. Sorrell said: “We expect, as usual, Q4 profitability to be the strongest quarter of the year. “We remain confident our strategy, business model and talent, together with scaled client relationships, position us well for above-average growth in the longer term.” Given the current caution among CMOs across the globe, growth may not be forthcoming. Basterfield said that “expectations for Q4 from a revenue perspective are now lower than they were.” Over a longer span, those efforts may aid its journey back to growth. However, at the time of writing, S4’s share price had fallen 13.85%. It’s down almost 70% compared with its position at the beginning of the year. The bulk of S4’s revenue – 55% – comes from just 13 clients, according to Sorrell. A more diverse portfolio of clients would insulate it against macroeconomic trends such as the tech sector slowdown, which has affected it and many of its rivals, but demand among its smaller, newer clients has been low. According to the company statement, “overall demand was lower, particularly in the newer regional and local clients.” Given that layoffs were also targeted at its local and regional businesses, per Basterfield, its ability to turn that situation around may be limited. AI-related projects may provide some demand going forward. According to Scott Spirit, the company’s chief growth officer and executive director, it’s the number one topic of conversation between the company and clients. In today’s statement, the only parts of S4’s business that recorded growth in the last quarter were its technology services arm, which accounts for around $110m in net revenue; its data, digital and media and content practices, which both saw third-quarter net revenue slide 1.4% and 4.4% respectively, account for the lion’s share. “We’re seeing a lot of [AI] conversations, a lot of new business opportunities with clients, and we are starting to see those convert,” he said on a call this morning with investors. “Initially, a lot of the work is around audits, workshops, examining the opportunities with AI because it is a significant change, not just for us and our people and the technologies that they use, but also for our clients, how they approach their marketing, how they structure it and how they build the relationships and even the remuneration models with their agencies.” S4 and Media.Monks have been among the most bullish organizations within advertising on generative AI and the economies of scale it can potentially deliver to them. They’ll likely play a big role in the firm’s proposition to the large multinationals it courts in the near future. But it’s not clear when its business will start to see those benefits show up on balance sheets. “It’s difficult, in all honesty, to say,” Sorrel told investors. The company is experiencing more and more demand among clients for auditing and discovery sessions around AI, but its benefits on S4’s own cost base and how it can improve the company’s margins are so far unclear. “We have to wait and see how that develops,” Sorrell said. “I think it all adds up to being positive for the industry and positive for ourselves.” Until then, the company is likely to remain a hostage to the fortunes of its largest tech clients. Sorrell concluded: “Our client list is very heavily technology geared… we [will] outperform when the technology clients start to become more confident about advertising and marketing spending.” Read more

Agency group Kin + Carta could go private if £200m buyout deal goes ahead. Tony Walford quoted in The Drum

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Potential buyer Apax says taking marketing group off the stock markets will enable sustainable business growth. What would it mean for the business? Kin + Carta, the British digital marketing group previously known as St Ives, may be set for acquisition by Apax Partners, a London-based private equity fund. In a statement released this morning, the company’s directors recommended Apax’s bid for the group. The company employs approximately 1,800 staffers worldwide through companies such as e-commerce consultancy Loop, digital consultants Spire and software firm Melon. John Kerr, chair of Kin + Carta, said the deal would allow the company to progress to the “next phase of development.” “We believe the offer to acquire Kin and Carta by Apax Funds represents an excellent opportunity for the Company to accelerate ambitious growth plans and scale the business, building on the acquisition and integration of leading data and technology companies, the development of valuable technology partnerships, and the creation of a strong portfolio of enterprise clients,” he added. Though the business was established as a printer and publisher, it grew through acquisitions to become a wider marketing group. A restructure and rebrand in 2018 saw some of its companies sold off as it pivoted to focus on the digital transformation sector. Recent business growth has been slow, however. Kin + Carta’s half-year results for 2023 showed that like-for-like revenue declined by 6%, while net revenue in its core UK market fell by 16%. The company’s profit for the first six months of this year was £6.5m. According to Tony Walford, partner at M&A advisory Green Square, the group performed less well than had been expected by industry observers. “Following all that – although they’ve done great work, got great clients, all that good stuff – the company’s performance hadn’t really matched market expectations,” he tells The Drum. Exposure to the same macroeconomic issues which have depressed ad spend across the sector, and an underweight share price, has held it back from expanding through deals of its own. Apax intends to delist the company and take it private. This could help insulate the group from the broader market pressures that have held it back from growth in recent years. “These companies [like Kin + Carta] that are floundering around at a poor valuation, they can’t buy anything,” adds Walford. “They’re totally straitjacketed. It makes perfect sense for private equity to come in and take them off the market. Take them off the market and do something proper with it.” In a statement, Apax said it wanted to invest in the business and “accelerate growth both organically and inorganically to continue building scale in key areas. “The changing economic backdrop has highlighted the importance of scale and diversification in the DX sector. Apax believes that as a private company Kin + Carta will be better placed to make the investments necessary to position the business for long-term success,” the statement read. “A partnership with Apax away from the public markets is expected to improve the potential for laue creation compared to the status quo… and position the company to create long-term value.” Based upon Kin + Carta’s current market capitalization and an offer of 110p per share, Apax could end up paying over £200m for the business. Assuming no other bidders become involved, the process of delisting the company could progress swiftly – though a 75% majority of shareholders is required to accept Apax’s proposal. Kin and Carta was the first B Corp to trade publicly on the London Stock Exchange. Read more

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