WPP Shouldn't Throw the Olive Out With the Martini
(Bloomberg Gadfly) -- Investors have been struggling to identify a catalyst that could revive WPP Plc's fortunes after a 41 percent fall in its share price over the past 13 months. They don't see the abrupt departure of founder CEO Martin Sorrell as that yet. But regime change, and the possibility of a strategic rebirth for the global advertising giant, is all there is to latch onto.
Whoever takes over from Sorrell will inherit a business with too much debt and too little growth. The balance sheet is stretched for a company that's guiding to zero revenue and margin expansion and grappling with deep structural changes in the media and marketing industries. Net debt of 4.5 billion pounds ($6.4 billion) was 1.9 times Ebitda at the year-end, higher than peers.
One swift remedy would be to sell off some of the sprawling empire, which would simplify the group too. Some analysts question whether WPP's market research unit fits with the rest of the business. Liberum sees it as the lead disposal candidate, raising a possible 3.5 billion pounds. The public relations arm is another option.
But hasty asset sales would probably be a bad idea -- even assuming good prices could be achieved. WPP has other ways of cutting debt with day-to-day cash generation. Just holding fire on more acquisitions would help. And it could ease off on share buybacks. Indeed, with Sorrell's lavish share awards ending, there will be less need for buybacks to offset the dilution ayway.
It would be better for a new boss to squeeze out more synergies between WPP's assets and show these to investors. Given the broad needs of today's corporate clients, there's logic to having creative, media-buying, data and analytics capabilities under one roof. What clients dislike is paying for the big office overheads that go with the traditional agency model, and WPP is a federation of traditional agencies. Already, the industry is trying new approaches such as putting teams to work at the client itself.
The 5 percent fall in the shares on Monday leaves WPP trading at a 27 percent discount to peers on a forward earnings basis. The weak share price is demotivating for staff. Talent won't stick around long.
Sorrell was a unique figure in the industry, always on a plane or a podium, and ever ready to swoop in and successfully love-bomb clients who were thinking of switching accounts elsewhere. It's not clear that big agencies require his type of Davos-style leadership today as Facebook and Google dominate the landscape. Hereon, WPP needs a manager with big-company experience who can mash its constituent parts together -- and make staff feel good about it.
Martin Sorrell is on the board of Bloomberg Philanthropies.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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