Decaux makes a global power play

Revenge must taste particularly sweet for French outdoor company JC Decaux this week.

Almost exactly a year since it was beaten by arch-rival Clear Channel to the trophy of British poster company, the More Group, Decaux has triumphed over this group and three other US rivals in the 625m auction to buy Vivendi’s poster and transport advertising division, Havas Media Communications – Outdoor Advertising (HMC-OA).

For a company often mocked as the inventor of the automatic self-cleaning toilet, the Superloo, the deal makes Decaux a force to be reckoned with. From being the largest global operator in advertising on outdoor items, such as bins, public toilets and newsstands, it now adds billboards and airport advertising to its activities. This makes it the world’s biggest outdoor advertising company by turnover, with sales of 800m, ahead of Clear Channel with sales of 520m. It becomes the second biggest player in the UK, just behind the More Group.

But revenge comes at a price. Family-owned Decaux has taken on a huge burden of debt with its bid for HMC-OA. The company is Europe’s biggest billboard operation across nine countries, including Mills & Allen in the UK, and the world’s biggest transport and airport advertising operation, which includes UK-based Sky Sites. The whole group makes an estimated profit of 20m-25m a year on turnover of 340m, which makes the deal look expensive on earnings.

But for Decaux, this acquisition is the key to maintaining its long-term position as a world-class player in the outdoor business. With the purchase of HMC-OA, Decaux now has the critical mass in Europe to compete head-on with the Americans in the rest of the world.

Decaux chief executive Jean-François Decaux says: “If we had failed, it would have been very difficult to compete worldwide in all sectors of outdoor. It would have taken a lot of time to buy a similar number of businesses, which is why this one was critical.”

Failure would also have been a crushing blow to family pride Рhow could chief executive Jean-Fran̤ois allow the company built up 35 years ago by his father Jean-Claude Decaux to become an also-ran?

The deal was signed on Saturday at 3am in Paris, after the final bids were submitted the previous day by Decaux, Clear Channel, US giant Outdoor Systems Inc (OSI), CBS-owned TDI and the outside contender Texas Pacific, the US private equity firm.

As the bidders jockeyed for position, OSI was widely seen as the one to beat. This aggressive US operation had already successfully swooped on two massive American outdoor companies and was determined to break into Europe. TDI and Clear Channel were known to be keen, although they would have faced ownership restrictions if successful.

Neither company would probably have been allowed to own Mills & Allen – both own UK businesses and would have come up against competition constraints. CCI would certainly not have been allowed to own Havas’ Irish business for the same reasons.

But Decaux was determined not to be beaten by OSI. The company has intimate links with the highest levels of French government, cemented in the days when French president Jacques Chirac was mayor of Paris, and it is understood that it received assurances there would be no competition problems over its new holdings in France.

Moreover, Decaux was not about to roll over and let the Americans onto its home turf. Since 1964, when company chairman Jean-Claude Decaux came up with the idea of putting six-sheet posters on bus shelters, Decaux has dominated the French street furniture market.

From this sound financial footing, Decaux has extended around the world. The deal struck in the Sixties gave the company a platform from which to bid against rival outdoor companies for big overseas street furniture contracts in places as far afield as Sydney and New York, where the fierce competition pushes down margins.

But in 1997, the More Group achieved a breakthrough in Decaux’s backyard, and won the street furniture contract for Rennes in Brittany. Perhaps fearful that its days as the unchallenged market leader in French street furniture were over, Decaux had a strong impetus to diversify into billboards and transport.

Having taken on such a huge amount of debt, Decaux is expected to float part of its equity to help raise finance in order to meet interest payments on its borrowings. Jean-François says: “It is a possibility which we are discussing within the family. We don’t need to own 100 per cent of the equity. It will take place in the near future. It could be in London, New York, or both.”

He says Decaux was debt-free before the deal, that it can easily finance it, and that swathes of job cuts will not automatically follow.

But the purchase will inevitably worry Sky Sites and Mills & Allen staff, who fear that the new owners will cut out any duplication in management, or development and sales teams.

Decaux insists it will invest in its new businesses. In this respect the company’s reputation for quality and innovation is widely acknowledged. There are those who say it has no choice – it must upgrade its outdoor products by illuminating and landscaping them, for example, so it can justify achieving a better return.

If Decaux succeeds in adding value to its businesses it could be good news for the outdoor market as a whole, pushing up margins across the board and providing advertisers with opportunities for better campaigns. If it fails, this acquisition will look more like a defensive measure, which will keep Decaux in the outdoor super league in terms of size, rather than profits.

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