Sectors: Creative, Media & Technology

S4 Capital has reported a 25% drop in core earnings after what the group described as a “difficult” 2023. Will things get any easier in 2024? Green Square’s Tony Walford examines its prospects and explores whether a mooted mega-merger could offer salvation. Sir Martin Sorrell is an incredibly resilient character, indeed potentially the most resilient of our industry over the last 50 years. His career includes being ‘the third Saatchi’ in the ’70s, where he completed multiple acquisitions, through to creating WPP in the ’80s (and building it to be the largest marketing group in the world), to creating his current digital group, S4. His career has seen him deal with many issues, from personal slants following hostile takeovers, criticism from institutional shareholders over his employment contract, shareholder revolts over his remuneration, and the famous Shepherd’s Market personal misconduct accusation. The latter led to him being ousted from WPP and creating S4, the vehicle he used to buy the highly regarded creative production outfit Media.Monks and subsequently making MightyHive S4’s first digital media buy. S4 has since completed over 30 acquisitions on a funding model that includes a mix of cash and S4 shares and no earnouts – the idea is the earnout is effectively replaced by the future increase in value of the shares received by those selling in. However, S4’s share price has declined from 878p in September 2021 to today’s 40p, following myriad issues that started with delayed audit reports on fears of poor financial controls and accounting practices, through to repeated profit warnings and worries over Sorrell’s own health. Today’s results announcement was really nothing new – more tales of woe, clients spending less due to recessionary fears, challenging macroeconomic issues, revenues for 2024 anticipated to be down again, but operational profits expected to hold constant. There was no joy in there aside from its debt at £180m being at the bottom end of expectations – a little ray of light in a high-interest rate environment – and a possible first dividend if the second half of 2024 looks good. So, where does this leave S4? There have been rumors of a bid by Stagwell at a premium to S4’s current £240m market value. Sorrell has dismissed this by saying he has not received a credible approach, but surely others must be circling. Despite the current share price languishing around the 40p mark, S4 has some great talent from smart acquisitions. It has a solid blue-chip client base, 10 of which are each delivering over $20m in revenue (albeit a very significant chunk of S4’s revenue comes from the tech sector, which is facing its own challenges) and it has taken action on cost reduction. Thus, it remains an attractive proposition for many competitors that could do with this expertise and client base, which is why I expect to see more approaches over the coming months. It’s hard to see where S4 can go from here on its own. As mentioned earlier, its model has been built on acquisition, buying agencies with a fairly big chunk (up to 50%) in S4 shares. When your share price is 800p+, you don’t have to issue that many to get to a decent value. When it’s 40p, you have to issue 20 times that number to get to the same price. So, S4’s hands are tied unless it’s prepared to significantly dilute – not a very attractive thought. And what will those who took shares at 800p be thinking? Not only has the share consideration element they received dropped by 95%, but they must question if it is ever going to recover. And given S4’s repeated profit warnings, who would want to become part of that group at this moment in time? But you could argue for the share price, the only way is up. I’ve said it before – underestimate Sorrell at your peril. He is the King of Resilience and I hope that the next piece Green Square writes on S4 is a more positive one… not least because I am also a shareholder. Read more

WPP boss Mark Read says the holding company’s 2023 figures show it weathered a tough year. However, analysts suggest there are still plenty of questions to be answered about operating models and AI. Despite a “tough year” for much of its agency portfolio and exposure to lower tech client spending in the US, WPP chief executive officer Mark Read says the British holding company has put in “a resilient performance” in its last year in business. WPP, the parent firm behind agency brands such as VML, Ogilvy and GroupM, released preliminary figures for its 2023 commercial performance today (Thursday). The group employs around 115,000 staff worldwide, making it the largest agency employer in the industry. Revenue less pass-through costs, a measure broadly equivalent to net revenue, at the holding company, came to £11.8bn ($14.9bn) – an increase of 0.9% on last year’s performance, in line with previous expectations. But harsh trading conditions meant the group brought in $4.5bn in net new business revenues, down on $5.9bn in 2022. Speaking to The Drum, Read says: “We had two very strong years of growth coming off Covid, and there’s no doubt that 2023’s been a little more challenging for us. A bit like the technology companies, we’ve been in something of a year of adjustment. Maybe, given the strong growth post-Covid, that shouldn’t be surprising.” The earnings report follows an earlier release of figures in January when the firm held a capital markets day intended to entice and reassure shareholders. The company expects revenue less pass-through costs to increase between 0 and 1% this year, while its margin is estimated to increase by 0.2-0.4%. Growth at the group – as has been the case among several of its competitors, including Interpublic Group and Dentsu – was slower last year, partly due to the tech sector downturn. Lower spending in other areas also held back WPP revenues. Revenues from retail clients fell 11.3% compared with 2023, while financial services, healthcare and pharmaceutical client revenues also fell in the fourth quarter of the year. Revenues from WPP’s ‘global integrated agencies,’ which include GroupM, Ogilvy, and AKQA, accounted for 83% of its revenue. But underperformance at key agency brands dragged revenue growth down; without GroupM, that portion of WPP’s business saw revenue less pass-through costs fall for the last three quarters. Wins at Ogilvy – including clients such as H&R Block, Mondelez, SC Johnson and Verizon – were offset by the commercial performance of AKQA and VML. Read says a turnaround in fortunes at the latter shops would depend more on market trends than on operating models. “I don’t think it’s about what one has done well and one has done poorly,“ he says. “Ogilvy has benefited from a strong, creative renaissance… a really good track record of winning new business. VML and AKQA have suffered from their exposure to technology clients, and project-related technology spend has probably hit them a little bit harder than Ogilvy,” he says. “Ogilvy has been a standout performer.”

Questions over AI and restructure scheme

The holding company’s significant cash investments in AI capabilities have already begun to improve commercial performance at VML and AKQA, Read claims. But details beyond what was already unveiled at the firm’s January capital markets event are few and far between. “[AKQA and VML] are benefitting from [the investments] already. We now have 30,000 people across the company using WPP Open, many of whom work at VML and AKQA… we’re seeing benefits already from those programs in terms of our new business performance,” he says. ”It’s still early days to see a long-term impact on the business overall, but we’re absolutely committed to our investments in that area.” Short-term impacts are also unclear. According to Nick Berry, partner at M&A consultancy Green Square, the impact of WPP’s AI investment “isn’t filtering down into the numbers in a tangible way as yet.“ “There isn’t anything specific in terms of job losses or job creation. How is it going to change their engagement with clients? What’s it going to change in terms of their operating model?“ For the meantime, the firm is committed to internal investment in AI, rather than adding expertise through agency acquisitions, Read says. “I don’t know if there’s a path today to really develop your AI business through M&A,” he says. “We were fortunate to acquire Satalia two and a half years ago. I don’t know that there are things available to buy today that would bring us the expertise that that team has been able to bring.” Though WPP’s results fell within predicted ranges, its share price had fallen 4.7% at the time of writing. Berry says that reception stems from expectations among shareholders of better-than-predicted results and the amortization costs of WPP’s VML merger. “They expect surprises. [WPP] has not revised what they think 2024 is going to look like; delivering what was expected gets you hammered. You’ve got to have another story,“ he says. Amortization costs relate to intangible assets – such as agency brands. WPP estimates that the VML and Burson mergers incurred a one-off amortization of £728m ($918m) in 2023, a figure that includes millions of dollars used to buy the companies initially. “That’s £346m of what was spent to buy those brands that has now gone. And they’re the sorts of things that bug the City,“ says Berry. Despite the cost of last year’s big mergers (and the immediate reaction of shareholders), he suggests that a healthier new business plan is a sign that WPP’s plan will eventually pay off, adding: “If that proves to work, and people do find the model is simpler and they pull off some client wins… there’s evidence that the logic behind that is coming to bear.“ Adds Read: “We look at 2024 with optimism. We’ve got great plans around AI. We have a very strong new business pipeline. We’re doing great work for our clients, who are many of the world’s leading organizations. I think there’s tremendous opportunity ahead of us at WPP that we’re determined to capture.” Read more