Dentsu Drops After Agreeing to $4.9 Billion Aegis Deal

Dentsu CEO Tadashi Ishii and Aegis Group CEO Jerry Buhlmann
Dentsu Inc. Chief Executive Officer Tadashi Ishii, left, and Aegis Group Plc Chief Executive Officer Jerry Buhlmann pose for a photograph ahead of the today's announcement in London. Photographer: Daniel Lewis/VisualMedia via Bloomberg

Dentsu Inc., the 111-year-old Japanese advertising company, fell by the most in 16 months in Tokyo trading after agreeing to buy Britain’s Aegis Group Plc in a 3.16 billion-pound ($4.9 billion) deal.

Dentsu dropped 7 percent, the biggest slump since March 2011, to 2,145 yen at the close in Tokyo. Aegis gained 0.1 percent to 235.6 pence as of 9:49 a.m. in London, extending yesterday’s 45 percent jump.

The transaction, the biggest in Dentsu’s history, would create one of the largest ad companies vying with global firms including Dublin-based WPP Plc and New York-based Omnicom Group Inc. The deal will probably boost Dentsu’s goodwill assets to just under 340 billion yen ($4.3 billion), Bank of America Merrill Lynch said in a report dated July 12. Goodwill was 44.3 billion yen as of March 31, data compiled by Bloomberg show.

“It’s a significantly large transaction that will lead Dentsu to post some goodwill assets,” Masamitsu Ohki, a fund manager at Tokyo-based Stats Investment Management Co., said by phone today. “There need to be good business synergies to justify the price. Taking all those into consideration, the deal may be negative for Dentsu stock.”

Aegis is the biggest independent buyer of advertising space and this year won a contract to manage a $3 billion annual ad budget for General Motors Co. The deal may help Tokyo-based Dentsu expand globally and reduce its reliance on Japan, where the company generated 86 percent of its sales in the year ended March 31.

Big Deal

The acquisition is the fourth-biggest ever advertising deal, according to data compiled by Bloomberg, behind R.H. Donnelley Corp.’s $9.7 billion 2006 deal for Dex Media Inc., WPP’s 2000 purchase of Young & Rubicam Inc. and Infinity Broadcasting Corp.’s acquisition of U.S. outdoor advertiser Outdoor Systems Inc. in 1999.

Aegis shareholders will get 240 pence in cash, or 48 percent more than the stock’s July 11 close in London, in an offer recommended by directors, the companies said yesterday in a statement. Dentsu has bought a 15 percent stake and will acquire a further 5 percent from companies controlled by Vincent Bollore, Aegis’s largest shareholder.

The deal values Aegis at about 12 times the company’s earnings before interest, taxes, depreciation and amortization. Global advertising acquisitions in the past three years fetched a median multiple of 8.7 times earnings, according to data compiled by Bloomberg.

Japan Abroad

The purchase is the biggest overseas takeover by a Japanese company this year after Marubeni Corp.’s $5.6 billion Gavilon Group LLC deal, data compiled by Bloomberg show. Overseas acquisitions jumped to a record $88 billion last year, the data show. So far in 2012, Japanese companies have made about $38 billion of cross-border deals.

“It’s understandable the company would seek growth overseas as the Japanese market is saturated,” said Hideki Takoh, a Tokyo-based analyst at Citigroup Inc. “Still, the acquisition price looks high and investors are skeptical how much profit and synergy Dentsu can create out of this buyout.”

Some previous overseas takeovers by Japanese companies have struggled with losses.

Nomura Holdings Inc.’s acquisition of the European and Asian units of bankrupt Lehman Brothers Holdings Inc. in 2008 was supposed to be a game-changing bid to compete head on with Wall Street banks weakened by the financial crisis.

After the Deal

Instead, the head of Nomura’s wholesale business, which includes investment banking and trading, Jesse Bhattal and his lieutenant Tarun Jotwani, left the company amid a clash with Nomura’s old guard over competing visions for the future of Japan’s largest brokerage.

Daiichi Sankyo Co., a Japanese drugmaker, has lost more than half of its market value since agreeing to buy a majority stake in India’s largest drugmaker Ranbaxy Laboratories Ltd. in June 2008. Most of the drop occurred after the U.S. Food and Drug Administration banned imports from two of the Indian unit’s plants because of manufacturing violations.

Dentsu will have to show its management can handle overseas operations in addition to mapping out a strategy for how its business fits with Aegis, Takoh of Citigroup said.

“Although there are chances this transaction will help Dentsu promote its overseas strategies, it won’t be easy for the Japanese company to manage Aegis and retain talented employees,” he said.

Aegis Managers

Dentsu will consider consolidating Aegis from next fiscal year if it closes the acquisition by the end of December, Executive Vice President Shoichi Nakamoto said at a press conference in Tokyo. Dentsu plans to keep current Aegis managers, he said.

Publicis Groupe SA, the third-largest advertising company, ended a strategic alliance with Dentsu this year when it bought back its shares held by the Japanese company. Dentsu still holds a 2.1 percent stake in Paris-based Publicis.

Advertising researcher MagnaGlobal reduced its global ad spending forecast for 2012 to 4.8 percent from 5 percent last month. Worldwide ad spending is projected at $480 billion this year and the company said ad markets should benefit from expansion in emerging markets as well as the Olympics and U.S. elections.


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