Is Publicis perusing its perfect private equity partner?

The rumour mill has been in overdrive in recent days, fuelled by reports that French network Publicis Groupe has been in talks with an unnamed private equity (PE) house over a possible sale. [Publicis Groupe denies the company is holding any merger talks.]

It’s not as shocking as it might sound. Yes, it would be a big investment as Publicis has a current market capitalisation in excess of €10bn, but in other sectors that number wouldn’t raise any eyebrows. Last year there were two PE transactions of this scale globally and four in 2019, although we’re accustomed to higher volumes of smaller deals in our industry.

Furthermore, it makes sense for private investors to look at one of the big holding companies – and vice versa. The publicly-listed networks have to please their institutional stakeholders with consistent dividend yields and debt servicing. Unlike private companies, if their boards receive an offer that may represent best value for their investors, they’re required to explore it fully.

While at the same time, PE houses have banks of investment professionals constantly on the lookout for opportunities for significant capital growth, and markets facing considerable disruption and requiring business reinvention over a three-to-five-year period are their primary focus.

If that doesn’t describe the marcoms networks, I’m not sure what does.

A sector looking to redefine

In the past five or 10 years the industry has been completely reshaped. Brands are moving more of their activity in-house and changing their whole marketing, media and production procurement models. Management consultancies are accelerating this movement by building totally new combined value propositions, and new players are entering the market from adjacent sectors.

It’s therefore not so surprising if a big network were to see the attraction of tackling this next phase of reinvention as a private company. Many have been hit by falling share prices and are widely regarded as under-valued, which makes it even more expensive to address all the work that lies ahead to redefine their business models to better fit this drastically changed market.

That level of surgery likely requires capital, and certainly will pile the pressure on the short-term margin performance that drives the dividends that shareholders demand. Perhaps private ownership and the ability to invest – in the widest sense of margin dilution and potential capital deployment – without external attention, is a better choice.

Why Publicis and not, say, Omnicom? It may be appealing to PE buyers because it’s probably the least federal of the major networks, meaning that things can be done quickly as it is reasonably centralised.

Will a deal happen?

Will a deal of this type actually happen for Publicis? This is a completely different kettle of fish to the failed Publicis-Omnicom merger. That was about doing the same thing as before, only more efficiently, whereas the market now is about the ability to do something new.

This transaction would also have at least one side looking at it purely logically and analytically without politics, egos or nostalgia. Selling might be an emotional decision for the family members who still own shares in the company founded by Marcel Bleustein-Blanchet, but institutional investors have a fiduciary responsibility to view any offer solely on the basis of its financial merits.

It’s also worth bearing in mind any conversations may not have been about a complete acquisition of Publicis in its entirety, and this is certainly not the only possible outcome. The issues faced by so many networks aren’t helped by the fact that their different business units – media, creative, PR and so on – don’t always work as well together as current and future market dynamics require.

It may be that talks are centred around a specific division of Publicis – or its peers, because any or all of the Big Four networks could conceivably go down this buyout route. Buying a single unit would save the time, energy and not insignificant cost of carving up the business themselves and divesting piecemeal.

Clients are also increasingly looking for specialist providers, so a PE house could buy a major holding company’s creative or media business unit and exit by re-floating it as a specialist mini-network a few years down the line.

Building a better business?

The macro themes suffusing marcoms at present, of disruption and transformation, create a prime feeding ground for PE houses.

It will be fascinating to see if the rumours surrounding Publicis are any more than that, but in any event this will not be the last time that PE buyers and major agency networks are spoken of in the same breath. If recent years have taught us anything, it’s that most ‘shock’ deals are actually, when you sit down and think about it, anything but shocking.