Credit-default swaps on Publicis Groupe SA fell to the lowest since November 2007 after the firm agreed to merge with Omnicom Group Inc. to create the world’s largest advertising company.
Contracts insuring Publicis’ debt for five years dropped as much as eight basis points to 57.5, before trading at 58.8 at 3:49 p.m. in London, according to data compiled by Bloomberg. The 12 percent decline is the biggest since January 2009.
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 Omnicom are also falling, with contracts down as much as seven basis points to 46.5, the biggest decrease since 2009.
Publicis was the second-biggest decliner in the Markit iTraxx Europe Index of swaps on 125 investment-grade companies and Omnicom was the biggest in the equivalent Markit CDX North America Investment-Grade Index. Both benchmarks were little changed today.
“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.