Print Published 11th Feb 2019, 16:55

Spring cleaning time for the big groups?

Recent attempts by Publicis Groupe to shed some of its “non-core” businesses came hard on the heels of similar initiatives at WPP.  Is this simply a seasonal spring cleaning by new chief executives or should more be read into it?

At Publicis, there appears to have been a general cooling of its enthusiasm for the healthcare marketing sector.  Having bought into the sector when prices were rising, it appears to have found that not every acquisition merited such enthusiasm.  So chunks of the Publicis healthcare business have been sold to a private equity buyer (see Publicis completes sale of health solutions business).

Why a private equity buyer should be any more successful in profiting from the sector remains to be seen, albeit the particular buyer Altamont Capital Partners already had a portfolio of healthcare investments.  The explanation may be simply that private equity funds have more cash than they know what to do with while some experienced marketing groups seem to have decided that the healthcare marketing boom has peaked and have lost their appetite to invest in it.

Publicis now seems far more interested in database marketing and the technology applied to it. Publicis also seems more concerned about improving its revenue and profits than clinging on to disappointing investments. In 2018 alone the group made a provision of £100 million to cover the consolidation of group properties.

A similar way of thinking may well have permeated the corridors of WPP since Mark Read took the helm.   Apart from applying his favourite strategy of melding digital businesses with traditional marketing agencies, and attempting to rationalise some of its geographical coverage, Read’s biggest initiative was his decision to dilute WPP’s stake in the Kantar marketing intelligence operation, assuming someone would like to buy into it. (see WPP to dilute Kantar stake as group revenue falls).

But WPP seems to have been no more successful in enticing investors into a low margin over-valued part of its business than Publicis had been in finding a marketing industry trade buyer for its Publicis Healthcare Solutions business.

Maybe this is the discernible start of a trend in which trade buyers are becoming more cautious.  And if trade buyers are becoming more cautious, their business prospects may also be less exciting.  Or perhaps it is the other way round:  disappointing performances may be prompting marketing groups to shift their management emphasis away from buying more businesses towards maximising the profitability of what they already own.

If that is so, it hasn’t stopped Publicis from buying Soft Computing for an initial £38 million and the residual stake in Walker Media for £25 million this year.  That cash outlay was insignificant by comparison with the £1 billion cash generated from operations in 2018, but the balance sheet still remained highly dependant on funds provided by short-term creditors that exceeded readily realisable assets by £0.8 billion last December.

So far only Publicis has announced its results for 2018 and they were not good, sending its shares down by almost 15% (see Publicis Groupe’s revenue fall offset by lower earnouts and tax).  With revenue in decline at Publicis – and a revenue decline already reported at WPP in the first half of 2018 – the omens are not encouraging.  It will be interesting to see how the peer group has performed as a whole and whether more spring cleaning lies ahead.