Cerberus plan makes a dog’s dinner of Cordiant

I’m less interested in the fate of deflated advertising group Cordiant Communications that has been played out this week – and doubtless will continue to be played out in its constituent parts during the months to come – than in the positions adopted by those who have competed for its apparently undervalued assets.

Cordiant is, after all, just another beleaguered marketing services group. Its ill fortune was to find that it was unable to limp to the foothills of a recovered market, which WPP Group’s Sir Martin Sorrell believes will be reached sometime next year by the corporate refugees from the boom years of the late Nineties.

The ascent can then start again to the sunlit uplands of market prosperity. Meanwhile, some of the stragglers will have been eaten by their stronger rivals to sustain them on the long march. This is Cordiant’s fate.

In a recovered market, all that happened on this arduous journey through the lowlands will be forgotten, so it may be as well to record for posterity what some of the cannibals got up to along the way. In that spirit, let’s freeze-frame the players before the Cordiant dénouement.

Sorrell’s WPP had secured the recommendation of Cordiant’s board for his penny-share takeover bid of about £246m. Sorrell talked about the “fit” of the Asian businesses, the healthcare marketing and Fitch Design, as well as the attractions of in-store marketing, but Cordiant is at least as attractive for its undervaluation at the bottom of the market, if his predictions for recovery next year come true.

Then the US hedge fund Cerberus Capital Management barked at the entrance to the Hades into which Cordiant was about to descend. Cerberus holds a controlling stake in Cordiant’s senior debt and brought up the idea (earlier punted by Publicis alone) that it would force Cordiant into administration and carve up its assets with French advertising group Publicis.

This was a curious move that has nevertheless largely been accepted at face value (about £254m at the time). One or two voices were raised with regard to why Cordiant should be placed in administration, if a trading option were available as a solution to its woes. At least part of the answer is that administration offers a degree of protection from creditors.

That situation was further complicated by Cerberus’s position as just one such creditor – but I guess it’s better to own assets under these circumstances if you’re a creditor. The deal would see Publicis acquire the Bates advertising agency, the outstanding 25 per cent stake in the Zenith Optimedia media-buying operation and a load of other marketing services businesses.

Cerberus would get the pharmaceuticals marketing business, Fitch, and field marketing agency Headcount – very much the assets that Sorrell favoured. The Cerberus/Publicis deal brought Sorrell, who is genetically indisposed to over-paying for anything, back to the game with an enhanced offer, comprising a nominal £10m for shareholders and £244m for the debt.

But let’s just dwell a moment on the Cerberus solution. If a rose by any other name smells as sweet, then an asset-stripping exercise by any other name smells as foul. If a trading solution is available, then a court of administration should consider it favourably over a break-up, however briefly the company may linger under such administration.

This should be about shareholder value. Shareholders can extract value from an ailing firm either from a sale to a healthier group that can turn it around or from a break-up – but it has to be said that a break-up from administration is likely to offer weakest value, because we’re suddenly talking about a fire-sale. And, in this case, a fire-sale to two companies acting in a cosy manner.

So to the position of another Cordiant shareholder, corporate-raider Active Value, which holds the largest single stake in Cordiant at 14 per cent and claims to speak for a further 36 per cent.

Active Value is run by Julian Treger and Brian Myerson, who during the dot-com boom years used to make a big issue of shareholder activism – taking stakes in allegedly undervalued companies and then shaking up the management. This very often involved replacing the management, but it was always the idea that Treger and Myerson themselves wouldn’t get their hands dirty by taking executive positions themselves.

The pair were often photographed in the newspapers, in reproduction, winged-leather chairs, trying to look hard. As it turned out, many of the positions they took in companies remained spectacularly undervalued and they had to join the boards and run them themselves.

But these brilliant corporate-raiding boys do have a point in resisting the Cerberus/Publicis solution at Cordiant. If that deal offered only a marginal discount to the value of the debt – some 93 per cent – that hardly makes a case for putting the company into administration, does it?

One might add that Cordiant’s clients presumably have insolvency clauses in their contracts, so they can be voided in that event – making a further case against the administration solution.

Whatever has happened since, Cordiant has been the subject of some fairly bogus manoeuvres. It was said that Publicis flew into London from Paris early this week in an attempt to reassure Cordiant staff.

That must be like having your hair brushed by Madame Guillotine.

George Pitcher is a partner at communications management consultancy Luther Pendragon