Publicis Default Swaps Drop Most Since 2010 on Omnicom Merger

Credit-default swaps on Publicis Groupe SA (PUB) fell by the most in more than three years after the firm agreed to merge with Omnicom Group Inc. (OMC) to create the world’s largest advertising company.

Contracts insuring Publicis’ debt for five years dropped seven basis points to 58, the lowest since May 28 and one basis point shy of the lowest level since November 2007, according to data compiled by Bloomberg. The 11 percent decline is the biggest since May 2010.

The combination, which will bring together agencies including Omnicom’s BBDO Worldwide and Publicis’ Leo Burnett and Saatchi & Saatchi, will improve their ability to negotiate better ad rates. The all-stock deal was structured without issuing debt or new equity and as a merger of equals, with shareholders in each company holding about 50 percent of the new entity.

“We view this deal as credit positive for investors in both companies, given management’s commitment to a prudent financial strategy, the decreased likelihood of a debt funded bid for a smaller peer in the near term and the potential for upside through further scale and consolidation in the industry,” CreditSights Inc. analysts Mary Pollock and Mark Chapman wrote in a client note.

Swaps on Publicis are converging with contracts on Omnicom’s debt, which cost about 54 basis points. The four basis-point difference between the companies is the least since 2011.

Publicis’ drop was the biggest absolute decline in the Markit iTraxx Europe Index of swaps on 125 investment-grade companies. The benchmark was little changed at 102 basis points.

“The larger scale of the group might mean that Publicis might choose to refinance its current outstanding bonds when they mature with benchmark size euro denominated bonds which would improve the liquidity in the bonds,” Malin Hedman, an analyst at ING Groep NV in Amsterdam, wrote in a note to investors.

The deal is expected to be completed by the first quarter of 2014 pending regulatory and stockholder approvals.

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