WPP could sell its PR business after Sorrell’s departure, suggests analyst

Analysts had earlier argued that Sorrell’s resignation could lead to a break-up of WPP and spark other major changes to the shape of the industry, although a note published this morning by Liberum analyst Ian Whittaker gives more specific predictions.

“We think there is a significant possibility that WPP will now sell its Data Investment ie market research unit, and possibly PR, but that the rest of the group will be kept,” said Whittaker.

“This should drive a closing of the gap between the valuations and performance of WPP and the other agencies.”

PR growth

Revenue in WPP’s PR and public affairs arm rose just 1.7 per cent in its most recent financial year, with a fall of 0.8 per cent in the fourth quarter of what the company described as “not a pretty year” overall.

Revenue in the division, which includes Hill+Knowlton, Finsbury, Ogilvy PR and the newly merged Burson Cohn & Wolfe, was £1.17bn ($1.61bn) in 2017, up from £1.10bn ($1.51bn) in the previous year. It accounted for 7.7 per cent of revenue in 2017/2018.

Whittaker said Sorrell “could arguably be called the glue that bound much of WPP together”, and the chances of “significant chunks of the business being sold off” after his departure “have dramatically increased”. Data Investment is the “most obvious candidate” – a sale of the division could raise £3.5bn, Whittaker speculated.

“However, if the new management wanted to go further, then we suspect WPP’s PR assets could also be put up for sale, although this is less likely than a sale of the Data Investment unit.”

Lower margins

Whittaker pointed out that margins in the PR business are lower than the group average – at 8.1 per cent and 14.9 per cent, respectively – and there are “few revenue synergies between it and the other WPP assets”. He said a sale would raise £1.8bn, based on a valuation of 10 times underlying earnings (EBITDA).

Whittaker said an exit for the PR business could be to private equity firms, via management buyouts “or a mixture of both”.

He suggested that a sale of Data Investment and PR together would raise around £5.3bn, or just over 33 per cent of the market capitalisation that would be used to pay down debt, return cash to shareholders, or both.

Meanwhile, Whittaker was cool on suggestions that Sorrell could set up a competitor, which followed reports that the former CEO has not signed a non-compete clause. “We would not read too much into this given Sir Martin’s age but, more importantly, that WPP is his creation and he would not want to do anything that would be seen as damaging the company. Sir Martin still owns circa two per cent of the shares.”

WPP shares fell 3.9 per cent this morning, at the time of writing (10.15am UK time on Monday).

More on this topic:

Sorrell quits as WPP chief executive

WPP CEO Sorrell’s final thoughts on PR

Sorrell exit could spell the end for WPP, analysts say

Read, Scott to split duties as WPP joint COOs

The post-Sorrell interregnum at WPP will be a difficult period for the company

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