Havas Poised to Join Advertising Takeover Wave: Real M&A

Evian Babies Poised to Join Takeover Wave With Havas
An Evian roller baby commercial. Source: YouTube

Havas SA, the French advertising company known for its Evian roller baby commercials, is poised to join the industry’s biggest wave of deals on record.

French billionaire Vincent Bollore, who owns 37 percent of Havas, may be willing to sell after already agreeing to part with his holding in London-based advertiser Aegis Group Plc when it was sold to Dentsu Inc. for almost $5 billion in July, Agilis Gestion SA said. With the shares down 3.2 percent in five years, the Puteaux Cedex, France-based agency trades at a lower multiple to this year’s projected earnings before interest, taxes, depreciation and amortization than 91 percent of similar-sized ad companies, according to data compiled by Bloomberg.

A takeover of Havas would add to the more than $16 billion of acquisitions in the advertising industry already announced this year, including Dentsu’s purchase of Aegis that left Havas further behind its five larger rivals. The $2 billion firm with clients in more than 100 countries may lure interest from No. 3 ad agency Publicis Groupe SA or even Dentsu as the companies try to boost their media buying power, Liberum Capital Ltd. said.

“If you look at consolidation in the space, then Havas is a key firm to be acquired, despite its European weighting,” Ian Whittaker, a media analyst at Liberum in London, said in a telephone interview. “It would fit someone looking for scale, and there are very few mid-size agencies out there right now.”

‘Strategic Asset’

“Havas is a strategic asset for the Bollore Group,” Bollore said in an e-mailed statement when asked if he would consider a sale.

Havas Chief Executive Officer David Jones said Bollore has demonstrated his commitment to the company by increasing his stake this year and naming his son as deputy CEO.

“Bollore has been very clear and public about the fact his intentions are very long term,” Jones said in a phone interview. Havas’s smaller size is an asset because it allows the company to be more flexible and work closer with clients, he said.

Shusaku Kannan, a spokeman for Tokyo-based Dentsu, said the company’s policy is not to comment on speculation. Publicis spokeswoman Peggy Nahmany also declined to comment when asked if the company is interested in acquiring Havas.

Dentsu, the 111-year-old Japanese advertising firm, agreed to buy Aegis, which this year won a contract to manage a $3 billion annual ad budget for General Motors Co., to help expand globally. The deal followed WPP Plc’s $540 million purchase of U.S. digital agency AKQA in June. Then, Paris-based Publicis announced last month that it will acquire Dutch digital agency LBi International NV, also for $540 million.

Record Deals

So far this year, $16.7 billion of deals have been announced for advertising companies, already more than double the total volume in 2011 and the biggest year for the industry on record, according to data compiled by Bloomberg that dates back to 2000.

“Companies have spent the last three or four years getting debt down and generating cash and are now in extremely strong financial positions with better balance sheets than 10 years ago,” Alex DeGroote, a media analyst at Panmure Gordon & Co. in London, said in a phone interview. Healthier balance sheets have helped jumpstart industry consolidation, he said.

Publicis, for instance, has reduced its total debt to about 1.7 billion euros ($2.2 billion), the lowest level since 2008, data compiled by Bloomberg show.

Lower Forecasts

Global marketing companies are coping with declines in areas such as newspaper and magazine advertising, as well as increased competition from technology companies such as Google Inc. and Facebook Inc. that offer their own digital ad services. Clients are also cutting spending in Europe as the debt crisis deepens.

Prior to the Dentsu deal, speculation that Bollore would combine Havas and Aegis was so widespread that even Martin Sorrell, CEO of the world’s largest advertising company WPP, had said he expected such a union. Bollore also dropped hints over the years, including in a 2009 interview when he said that “all the doors are open” to a possible merger of the ad firms.

Bollore’s decision to instead sell Aegis could signal the French entrepreneur is also ready to divest Havas, according to Arnaud Scarpaci, a Paris-based fund manager at Agilis Gestion, which owns Havas shares.

“Havas is still independent, but not for much longer,” Scarpaci said in a phone interview. “An acquisition could unlock value, and we’ll for sure see more consolidation in this sector.”

Today, Havas shares rose 0.9 percent to 4.04 euros at 3:24 p.m. in Paris, on pace for the highest closing price in a month.

Undervalued Stock

Havas shares had climbed 43 percent in the last year, giving the company a market value of 1.53 billion euros on Sept. 28. The increase outpaces WPP’s gain of 34 percent and Publicis’s 36 percent. Dentsu has fallen 20 percent, with declines accelerating after the Aegis purchase was announced.

Even with the recent stock gain, Havas shares were down 3.2 percent in the last five years through last week, and the company is trading for an enterprise value that’s only 5.4 times projected 2012 Ebitda, based on analysts’ estimates compiled by Bloomberg. That’s a cheaper multiple than 21 of the 23 other ad companies in the world with market values higher than $500 million, data compiled by Bloomberg show.

Havas, with clients including Hershey Co. and Pfizer Inc., is considered to be one of the last remaining sizeable targets in the industry, and it’s undervalued, said Liberum’s Whittaker.

Publicis CEO Maurice Levy said in a July interview that he passed on a bid for both AKQA and Aegis, and “considered the price paid was too high.” He still predicted more industry consolidation.

Publicis Combination

For a potential suitor such as Publicis, Havas would offer scale in terms of media planning and buying, Whittaker said, as well as opportunities to cut costs in staffing, operating expenses and back-office activities.

Whittaker estimates that an acquisition of Havas could fetch almost 2 billion euros, a 31 percent premium to the company’s market value as of Sept. 28.

Havas’s most prominent advertising agency, Euro RSCG, was renamed Havas Worldwide last week and is known for memorable advertising campaigns, including the 2009 commercials for Evian water that featured babies on roller skates. The ad has been viewed almost 60 million times on YouTube, placing it among the most watched in online advertising.

“The synergy opportunities between Publicis and Havas are ideal and, secondly, you’d get a bigger client roster,” said Panmure’s DeGroote.

Even more likely than Publicis may be a purchase by Dentsu, DeGroote said, which would finally unite Aegis and Havas.

‘Sleeping Lion’

Dentsu, which gets the majority of its revenue from its home market of Japan, is already expanding internationally with the acquisition of Aegis. Buying Havas, which got about 32 percent of its 1.65 billion euros in sales last year from North America and almost 53 percent from Europe, would further that ambition, DeGroote said.

“Aegis could be just the start for Dentsu,” he said. “With Havas they’d be a seriously credible and seriously large combined entity. Dentsu is a sleeping lion, and with the Aegis purchase, that lion has awakened.”

Dentsu and Aegis would have a combined market value of about $11.5 billion, based on last week’s closing values.

According to Charles Bedouelle, a media analyst at Exane BNP Paribas, any future deal with Dentsu would be at least several years away as the Japanese advertiser awaits clearance of -- and pays for -- its Aegis transaction.

Europe Dependence

Havas’s dependence on Europe -- where the economy is projected to contract this year for the second time since 2008 - - for more than half of its revenue could prove to be an obstacle to a deal, said Conor O’Shea, a media analyst at Kepler Capital Markets in Paris. The French company also generates less revenue from digital services than its competitors, and more takeovers lately have been driven by digital, he said.

Unlike WPP and Publicis, which each derive more than a third of revenue from digital, Havas only earns about 25 percent from such services. At Aegis, the figure is about 40 percent, O’Shea said.

Bedouelle, who is based in London, said he doesn’t think that Bollore will sell. Bollore’s stake in Havas increased to more than 37 percent from about 33 percent because of a company share buyback announced in March.

“There is no way Bollore is going to sell Havas,” Bedouelle said in a phone interview. “He’s put his love and energy into the brand and he wants his kids to run the company.”

His son, Yannick Bollore, was named deputy CEO of Havas in August.

Bollore Bet

“In the world of business you can never be certain, but I would bet you anything that Havas will be part of the Bollore Group in a decade,” said Havas CEO Jones.

Bollore may instead buy another advertising company to combine with Havas, said Brian Wieser, a media analyst at Pivotal Research Group in New York. Bollore could choose to partner with Publicis or Interpublic Group of Cos., the second-largest U.S. ad agency, or even a private-equity firm, Wieser said. Tom Cunningham, a spokesman for New York-based Interpublic, and Nahmany from Publicis declined to comment on whether the companies are exploring partnerships with Havas.

“There’s no question that Havas’s margins would improve as part of a larger entity,” Wieser said in a phone interview.

While ad spending is still projected to increase, estimates are being trimmed this year. WPP’s research unit, GroupM, in July cut its forecast for worldwide advertising growth in 2012 to 5.1 percent from 6.3 percent.

With the advertising industry expected to post slower growth, now may be the right time to strike a deal, Panmure’s DeGroote said.

“If the market outlook is a bit soft, companies may get busy doing some stuff corporately,” he said. “It’s a proven idea to grow profit through acquisitions in a downturn.”

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