It’s not quite David and Goliath but there are plenty of similarities. On one side there is WPP, one of the world’s biggest advertising and marketing groups, weighing in with a market capitalisation of just under £10 billion and a coveted slot in the FTSE 100 index of leading companies.
On the other there is S4 Capital, an upstart rival created barely two years ago but valued by the stock market at just under £2.8 billion and big enough, were it not in one of the London Stock Exchange’s special segments, to sit in the FTSE 250.
Between them, along with other heavyweight players such as Publicis and Omnicom, they vie for a share of the advertising and marketing budgets of companies worldwide, a difficult business against the backdrop of a sector that has been transformed by Google and Facebook.
While WPP plays in traditional media including newspapers and commercial broadcasting, S4 Capital is entirely digital, seeing itself as a company solely occupied with the newer world of messaging through the internet and social media.
There is, of course, one figure that unites them — Sir Martin Sorrell, the 75-year-old ad industry titan who created both businesses and arguably each in his own form.
The established player
Sir Martin effectively founded WPP in 1985, when he took control of a small company called Wire and Plastic Products and began to transform it through audacious takeovers, several of them hostile.
The latterday WPP employs 107,000 people in 112 countries and counts among its clients global corporations from Unilever and Dell to Glaxosmithkline and Ford Motor.
Yet when Sir Martin left WPP in April 2018, having been one of business’s go-to campaign managers for decades, it was beginning to spiral into crisis.
Then WPP’s problem was that it was not successfully adapting to the changing world it was operating in. Not only were some of its biggest clients, including Procter & Gamble, bringing their marketing work in-house, they were also turning in large numbers to other media — Twitter, online advertising — to promote their brands.
Several large companies, including Ford, put their contracts with WPP under review and, abruptly it seems, it found itself with a serious growth problem. But that wasn’t the only issue. WPP had become a sprawling collection of agencies that weren’t communicating effectively with each other. At nearly £5 billion, its debts were too high and, at 60 per cent of its earnings, its dividend payout was unsustainable.
At the end of 2018, a turnaround began under Mark Read, 52, the technology whizz who had been the group’s joint chief operating officer.
The upstart
Meanwhile, Sir Martin was busy creating and developing his new venture, S4 Capital. The model he used to set it up was entirely different, save for his continuing love of acquisitions.
S4 Capital makes advertising content for its clients; it plans campaigns and it buys digital advertising. It also helps companies use the proprietary data they have to target products at existing and new customers. Though still young, it employs 3,750 staff in 31 countries.
Perhaps unsurprisingly, tech clients, including Google, Facebook, Spotify and Netflix, account for more than 50 per cent of S4 Capital’s revenues, though it also works for BMW, Fidelity and Hasbro.
Sir Martin seems to have learned a lot from what went wrong at WPP. His new enterprise operates as a unified structure, with one profit and loss measure to encourage staff joining to collaborate rather than compete. Bonuses are based on groupwide rather than individual performance. And companies are acquired using a combination of cash and shares, which is aimed at making the business think as a single entity.
Merger deals have come thick and fast, beginning with Mediamonks in 2018 just months after its creation and most recently taking in Tomorrow, a creative agency based in Shanghai.
Performance
On the face of it, the two companies have had contrasting fortunes in the past year. Reported revenues at WPP dropped by 12.3 per cent to just under £5.6 billion in the six months to the end of June, while turnover of £141.3 million at S4 Capital over the same period was 60.7 per cent higher than over the same time the previous year. WPP suffered an operating loss and its margins contracted, while profits at its smaller competitor surged and margins improved.
But that is only part of the picture. WPP is a work in progress but has noticeably improved under Mr Read’s leadership. Growth, including in the crucial tech market, has returned, the structure of the organisation has been simplified, margins have improved and the debt bill has been reduced to £2.7 billion.
Not only have plenty of existing clients been retained but WPP has also been winning new business, including from Intel, HSBC and Unilever in the first half of last year.
While WPP is working to release the value its business holds and making small forays back into acqusitions, S4 Capital is a no-nonsense growth engine. It is buying businesses at a rate of knots — collecting no fewer than seven last year — and the firms it takes on are similarly in growth mode.
S4 Capital has set itself the target of doubling organically by 2022.
Valuation
The reality is surely that, while winning business in the digitally driven world is extremely tough, there is room for both companies to generate respectable returns.
So for a prospective investor, it is a case of either buying into WPP as a long-term value creator or S4 Capital as a growth-hungry dealmaker.
While S4 Capital pays no dividend so has no yield, its shares, up 20p or 3.9 per cent at 536p yesterday, change hands for 36.7 times Numis’s forecast earnings.
Shares in WPP, down 14½p or 1.8 per cent at 798¼p, can be bought for 8.5 times Shore Capital’s earnings forecast and carry a generous yield of 4.7 per cent.
Tempus would like to own both shares but of the two would pick WPP. This is partly because there is plenty of value left to release and partly because of S4 Capital’s rather racy valuation.
ADVICE Buy WPP
WHY Its life-threatening period is behind it, the turnaround is progressing well, growth has returned and the shares are cheap
