ASIA: Unsteady start for Dentsu’s IPO

Dentsu made a disappointing debut on the Tokyo Stock Exchange (TSE) when trading started in the agency’s shares on Friday November 30. The stock opened at an initial price offer of Y420,000 (£2,380) – analysts had expected an opening price close to Y600,000 (£3,388). The shares then slid to Y405,000 (£2,287) before closing at Y470,000 (£2,655).

Even then it was a mistaken trade by UBS Warburg, one of the issue’s lead syndicators, at the start of Friday’s trading session that enabled the stock to open at its IPO price. Thereafter stock exchange trading regulations permitted a maximum rise of Y50,000 (£280). The TSE says it will investigate what went wrong on Dentsu’s first day of trade.

Dentsu’s market capitalisation based on its closing price is Y653.3bn (£3.7bn), with 1.39 million shares outstanding. The IPO raised a net Y10.5bn (£600m) for the agency.

Analysts expect the shares to perform well in the short term, partly because the offer was priced cheaply enough to give an easy capital gain. Monday’s (December 10) closing price was Y544,000 (£3,000).

At the IPO price of Y420,000, Dentsu would be trading at 8.2 times EV/EBITDA (enterprise value divided by earnings before interest, tax, depreciation and amortization). This is lower than its major international competitors, which have been trading this year in the range ten to 15.

But, longer term, Dentsu’s outlook depends on the overall performance of Japan’s weak economy.

Most major Japanese corporations are among Dentsu’s 6,000 clients. The agency handles 24 per cent of all advertising in Japan – about twice that of its nearest competitor Hakuhodo, and controls nearly half of primetime TV slots in Tokyo. But despite its large share, there are still some growth opportunities in Japan as advertisers gradually consolidate business into the top three agencies: Dentsu, Hakuhodo and Asatsu-DK. But these gains are likely to be small – Dentsu’s share rose to 24.2 per cent in 2000, from 23 per cent in 1985.

There is also uncertainty for investors in the form of Dentsu’s investment in a new HQ building. In its offer circular, Dentsu said that it would incur “significant expenses” next fiscal year related to the new building.

However, Dentsu says it plans to invest in, among other things, “strengthening its international network”, particularly in Asia. International growth could relieve Dentsu’s heavy reliance on the domestic market, making it less vulnerable to Japan’s economic problems. Last year, only 5.3 per cent of Dentsu’s consolidated net sales came from business outside Japan. But Dentsu’s international track record shows how difficult it is for a Japanese agency to succeed away from home. After a number of failed attempts over the past 15 years to grow internationally, last year it acquired 20 per cent of Chicago’s BCom3 Group for an estimated $400m (£2.26m).

While retaining their partnership with Young & Rubicam, Dentsu executives say that BCom3 is their primary international partnership, though the investment has yet to lead to significant new business growth internationally. The agency also denies it has any plans to increase its equity in BCom3

Despite the disclosure commitments of being a public company, Dentsu is holding firm to its traditions of opacity and non-disclosure. “We know very little more about its plans or strategies than we did at the outset of the IPO process,” says one analyst.