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A killer app?

3 Nov 2014 By Quentin Webb

Publicis is overpaying for a digital reboot. Performance is faltering at the French advertising giant after a failed transatlantic merger. The $3.7 billion purchase of U.S. group Sapient looks like a pricey distraction.

At $25 a share, this friendly all-cash deal comes in 44 percent over Sapient’s last closing share price. But that’s too flattering to the buyer. The stock soared last week. The premium to the average closing price over the last three months is actually 72 percent – or about $1.5 billion in total.

That’s hardly offset by 50 million euros ($62.5 million) of annual cost savings. Taxed and capitalised these could be worth about $400 million. So this looks value-destructive. Some investors were also anticipating buybacks or special dividends, which now look further away. Hence the 3 percent fall in Publicis’ shares in the wake of the news.

Valuation multiples are also punchy. Publicis touts an effective enterprise value of 14.1 times historic EBITDA after synergies. This becomes about 19 times before any savings, on Breakingviews calculations. That looks rich set against the last big advertising technology deal, Alliance Data-Conversant, which was valued at about 12.1 times EBITDA, Thomson Reuters data shows.

To be sure, these are testing times for marketing groups. The line between technology and advertising is blurring, new competitors have emerged, and the way people consume media and interact with companies has changed dramatically. So having a proper digital strategy is vital. It makes sense to put SapientNitro, the target’s flagship business, which crafts apps and Twitter campaigns for big corporations, alongside Publicis’ digital agencies. And Sapient had scarcity value as one of the last big independent specialists in digital advertising.

But Publicis already has its hands full. It keeps under-shooting guidance. There is still no answer on who will succeed veteran boss Maurice Levy. Performance in emerging markets is anaemic. And it is taking far longer than U.S. rival Omnicom to recover from the collapse of their planned merger back in May. Sapient has attractions. But it is hardly the “killer app” that makes Publicis a must-buy stock.


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