BREAKINGVIEWS-WPP breakup could deliver 25 percent upside

by Reuters
Monday, 16 April 2018 13:08 GMT

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Liam Proud

LONDON, April 16 (Reuters Breakingviews) - For most of WPP's history, investors gave boss Martin Sorrell the benefit of the doubt. Rapid growth enabled them to ignore the media group's increasingly unwieldy collection of advertising, media, public relations and other businesses. Now the 73-year-old has gone, a partial breakup up might allow Chairman Roberto Quarta to recover some of the value WPP has recently lost.

Sorrell's exit – announced on Saturday night after a probe into alleged "personal misconduct" which he denies – capped a miserable period for the 14.4 billion pound group. Low advertising spending by consumer goods companies forced WPP into a string of profit warnings. Its shares are down by a third in the past year. That's in sharp contrast to the annualised return including dividends of 8.2 percent that shareholders earned in the first three decades during which Sorrell built up the company – comfortably ahead of the 5.5 percent total return on the FTSE 100 index.

Past success gave the board some justification for Sorrell's huge pay package, which topped 70 million pounds in 2015. But it also helped deflect attention from the fact that the company's market value was substantially less than the combined worth of its sprawling businesses.

Quarta, who is taking the reins as executive chairman, could unlock some of that value by selling some assets. Market-research arm Kantar might fetch about 3.5 billion pounds, reckon Kepler Cheuvreux analysts. Minority investments in media businesses such as Vice, AppNexus, ComScore and others are worth a further 2.2 billion pounds, according to UBS. Strip them out and the rest of WPP is valued at 13.2 billion pounds including debt, or just 7.3 times its operating profit excluding those peripheral units.

That's well below the average equivalent multiple of 9.5 for peers like Publicis and Omnicom. Given similar prospects for the main ad business, that implies investors are marking WPP's value down in part due its sprawling structure. If selling some peripheral assets helped to eliminate the discount, WPP's equity would be worth about 18.3 billion pounds including the value of spun-off units, or more than25 percent above its current value. That would go some way to easing the concerns prompted by Sorrell's departure.

On Twitter https://twitter.com/liamwardproud

CONTEXT NEWS

- WPP on April 14 said Martin Sorrell, the ad group's chief executive of 32 years, would step down with immediate effect. Chairman Roberto Quarta will become executive chairman until the appointment of a new CEO.

- The London-based group has promoted Mark Read, CEO of digital-marketing agency Wunderman, to be joint chief operating officer alongside Andrew Scott, currently the group's corporate development director and COO for Europe.

- An investigation into Sorrell's alleged "personal misconduct", announced on April 3, has concluded and did not involve amounts of money that are material for the company, WPP said. Sorrell denied the allegations but in a letter to WPP staff published on April 14 said the "current disruption" was "putting too much unnecessary pressure on the business".

- Sorrell will be treated as having retired on leaving WPP. His share-based compensation will be awarded in line with the company's remuneration plan and will vest over the next five years depending on whether the group hits performance targets detailed in the pay policy.

- WPP shares were down 5.2 percent to 11.26 pounds at 1210 GMT.

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(Editing by Peter Thal Larsen and Bob Cervi)

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