To describe the company built by Sir Martin Sorrell over the past 32 years as sprawling is to underplay just what he created. Taking charge of WPP in 1986, Sir Martin achieved the feat of turning a Kent wire shopping basket maker into the world’s largest advertising agency group.
The company he has bequeathed to a successor is a business that employs more than 200,000 staff, working from more than 3,000 offices, run by more than 160 companies, held through 1,800 subsidiaries. Just getting their head around how the business functions may take his replacement at least a year or two.
However, whoever replaces Sir Martin is unlikely to be allowed the luxury of years; three earnings disappointments in 2017 and a profit downgrade last month will have seen to that. As was clear in the City yesterday, there is near-unanimity that the ad group must get on with divesting itself of some of its less attractive businesses, or even consider a full break-up.
At the front of the queue of divisions to be ejected is the underperforming Kantar market research business. Estimates vary about how much this could sell for, with some suggesting a price of £3.5 billion while others offer a valuation more than £1 billion lower. There would be a lot of interest, with Nielsen, a rival, likely to make a bid, while private equity groups could be involved.
Then there is WPP’s investment portfolio, which includes stakes in the likes of Vice, the media group, Comscore, the American media analytics business, and Globant, a software developer. Together this portfolio generates less than £100 million in annual revenues. With a valuation of about £2.2 billion, they look likely to come under the microscope now that Sir Martin has gone.
The money would be welcome. At £4.48 billion, WPP’s net debt is in need of pruning, although at 1.8 times earnings before interest, tax, depreciation and amortisation, it is far from onerous. However, many investors would prefer to see leverage reduced and shareholder payouts increased, rather than more bolt-on deals — which brings us to the wider strategy. WPP has been built by buying other businesses. The company spends between £300 million and £400 million a year snapping up everything from promising start-ups to fully fledged agencies. While Publicis, one of its biggest rivals, has spent recent years streamlining and simplifying its business, WPP continued on its familiar acquisition path.
The point is that Sir Martin’s dealmaking, for all its successes, created a group that was an elaborate web of semi-autonomous companies, operating in practically every sizeable area of human habitation, so that, as competitive threats have arisen, WPP has lacked the nimbleness to react as effectively as it might.
This’s not to say that WPP has sat on its hands. Digital revenues made up 39 per cent of group turnover in 2016 and in the first half of 2017 this rose to 41 per cent, putting the company on course to hit a target of generating between 40 per cent and 45 per cent of its income from digital over the next four to five years.
Anyone investing in WPP in recent years knew that their decision had to take in the likelihood that the group faced the prospect of appointing only its second chief executive in its history. That moment has come and despite the relative cheapness of the shares, which are trading at a 25 per cent discount to their five-year average, it would be foolhardy to plunge in now.
ADVICE Avoid
WHY The post-Sorrell future of WPP is still unclear and for now this is a company to be avoided until it can give more clarity on its strategy
Quiz
Retailing has never been for the faint-hearted and, as the pace of change seems to get ever quicker, those too slow to adapt find their shelf life cut short. Already this year there have been store closures by Toys R Us, Maplin, East and Carpetright, to name but a few.
Yet one fast-fashion specialist based in Glasgow has been upbeat since its debut on the Alternative Investment Market in July last year. Quiz competes at the value end with the likes of Boohoo.com and Primark. Founded in 1993 by Tarak Ramzan, it employs more than 1,000 people. A trading update last week showed a 30 per cent rise in annual sales to £116.4 million for the 12 months to the end of March. While online was the star performer, with 158 per cent growth, there were double-digit percentage increases across its British and international operations.
Yesterday the company said that it was going to start selling menswear for the first time via its online channels. Bridal and plus-sized clothing are going into shops, too, after web trials were successful, and a dedicated website for the American market is in development. The trading update suggested that profit margins were steady, although some spending on new staff has been brought forward.
The shares were priced at 161p on flotation, as the likes of Hargreave Hale, River and Mercantile, Schroders, Kames Capital and Blackrock were persuaded to invest. The Ramzan family sold more than £90 million of shares in that process, but two of the founder’s sons remain in senior positions, as does Mr Ramzan himself, who remains chief executive at 65.
Quiz shares peaked at close to 200p in August last year. They were as low as 125p at the start of last month but have rallied since then and are trading at close to the float price again, rising a penny yesterday to 159½p.
Given the company’s growth and ambitions, the fact that Quiz is trading slightly below the IPO price could offer a buying opportunity. However, the fast-changing nature of the retail industry and the unexpected costs that can arise from online and international expansion mean that caution is recommended.
ADVICE Hold
WHY Ambitious plans and on course to pay maiden dividend
