Flotation on the horizon for Y&R

Confidential documents revealing the financial performance of Young & Rubicam have cast new light on why the fiercely private US advertising and marketing group is selling a stake of more than 20 per cent to a leveraged buyout company.

The sale has triggered speculation, denied by senior Y&R management, that the group will seek a public listing. Private companies often find it harder to market and extract a full value from their shares than publicly-quoted ones. The figures suggest that Y&R’s profit growth in the recent past, though healthy, has lagged behind that of publicly-traded rivals.

A perceived inability to compete in the area of acquisitions – where Omnicom and the Interpublic Group have been strong – is believed to be another motive for the recapitalisation. It could also mean more money will be available for more competitive senior management incentive packages.

The injection of new capital, believed by City sources to be about $200m (132m based on 1=$1.52) has been orchestrated by San Francisco-based Hellman & Friedman. Y&R is coy about the reasons for the recapitalisation, except to say it will “repurchase a portion of its remaining equity”.

H&F will require a hefty return for its investment – the benchmark figure is thought to be 30 per cent compound interest a year for such transactions. H&F will eventually want to sell the stake (which at 30 per cent would double in value in under three years). Informed sources believe flotation would be the neatest solution to this conundrum.

The confidential documents, seen by Marketing Week, reveal a steadily improving financial picture for the group.

In 1994 Y&R made $91m operating profit against $53m the previous year, an improvement of 72 per cent. Operating income during the same period rose slightly from $951m to $1bn, resulting in a profit margin boost of three points to nine per cent.

But this lags behind the 13 to 15 per cent enjoyed by its publicly traded rivals such as Omnicom, Interpublic and True North. Y&R set a target operating profit of $125m for 1995 and has subsequently experienced strong new business growth. Y&R’s 1995 income surged to $1.2bn, on billings which moved up 23 per cent to $9.86bn.

Income growth in the US ran ahead of Europe in 1994 ($463m against $317m) and yielded a 17 per cent profit margin, the highest for any region except Latin America, where it was 26 per cent. Europe’s was the lowest rate at five per cent, an improvement of three points on the previous year.

Advertising produced income of $462m out of group income of $1bn in 1994, and yielded an operating profit of $65m, an increase of 37 per cent on the previous year. But the PR group Burson Marsteller revealed static income of $200m while, operating profit rose 75 per cent to $15m. Cato Wunderman Johnson’s operating profit rose 125 per cent to $21m on income up from $140m to $162m during the same period. The Dentsu Y&R network made operating profit of $5m on $64m income compared with $4m on $60m the previous year.