For all his star quality, Johnny Hornby is at his best behind the scenes: the smooth account man; the great fixer. Even that part of his private life which has become public – such as his love of sailing – is carefully stage-managed to flatter his clients (in this particular case, his founding one Charles Dunstone).
So he will have been in his element, pulling the strings, as the business coup of his life came up: the sale of his own agency. The extent to which he actually “engineered” the sale of 49.9% to WPP at the handsome price achieved is interesting to conjecture.
Let’s look at the end result and work backwards. There’s no doubt that on paper the deal represents a very good result for CHI indeed. The partners have achieved their strategic objectives (primarily international network coverage and media buying/planning capability). They have safeguarded their independence by insisting on the tried and tested “BBH model”, which allows them to maintain control through the retention of a slim majority of the agency shares. The remaining 50.1% will be placed in an employee benefit trust, owned by the agency partners; the implication being it can never be touched by WPP.
And, not least, they have managed to make rather a lot of money (much of it in up-front readies) by negotiating what plenty of commentators believe to be a “grossly expensive” valuation of CHI.
Laughing all the way to the bank?
Just how much the deal is worth remains speculation, except for those involved in it. But quite a lot can be inferred. CHI achieved revenues of £18.5m last year and profits are estimated at just under £3m. Given that the partners are laying claim to £27m (mostly upfront), that suggests a total valuation of about £60m, or a multiple of 20 times. The average prospective price-to-earnings ratio (PER) for listed agency groups is currently low to mid teens. So the boys haven’t done badly. And to extract much of that £27m upfront in cash, from Sorrell of all people, is no mean feat.
Many consider Sorrell wouldn’t have paid so much had it not been for Hornby skilfully playing off one potential suitor against another. As a matter of fact, the Dentsu option, which Hornby has tried to play up, always looked tenuous. True, Dentsu has been known to buy a minority stake in a UK agency, but the CDP experience was not a happy one. Besides, Japanese acquisitions tend to be a stately affair proceeding at their own majestic pace; and, as will be seen, CHI could not afford to wait.
The deal with Havas, by contrast, was a close-run thing. CHI had entered into a period of exclusive negotiations with the French marketing services group which only terminated on March 31. Havas’ keenness should not be underestimated. Its key presence in the UK, Euro RSCG, is a weak agency even after a year of rehabilitation under the stewardship of Mark Cadman and Russ Lidstone. Nor, with Vincent Bolloré at the helm of Havas, was money a real issue.
The problems were strategic misalignment and control. David Jones, head of Euro RSCG Worldwide, seems to have envisaged a micro-agency presence for CHI working alongside Euro, which was at odds with the CHI partners’ vision of partial integration into an international network. Worse, Bolloré wanted a slim majority of the shares (minority shareholdings cannot be consolidated in the main company’s account, which makes BBH-style acquisitions look financially unattractive). Finally, Bolloré appears to have put intolerable pressure on the deal by announcing, prematurely as it turned out, that it was going through.
Yet the idea that Sorrell, who has managed to craft a deal with almost indecent haste since April 1, was acting out of corporate machismo needs careful qualification. No doubt he has welcomed the opportunity for some flamboyant one-upmanship on Vincent Bolloré. But CHI is much more than a trophy, coming as it does so soon after the disintegration of the United concept. While it may never have proved itself the creative hotshop that WPP so sorely needs in London, it is a formidable new business machine. An asset Sorrell is particularly pleased to have got his hands on is Simon Hall and the Hall Moore CHI unit that will now be integrated into the main agency.
Did Sorrell succumb to vanity and allow Hornby & co to manoeuvre him into overpayment? CHI cannot have held all the cards at the negotiating table. The ‘For Sale’ sign has now been hoisted for some time; all talk and no action makes clients unhappy. Moreover, there is a suspicion that at least some of the partners need the money. Overplaying your hand in these negotiations can have some nasty repercussions, as the partners of Leagas Delaney found out to their cost a few years back. No doubt there were other potential partners (Dentsu maybe not among them) but these were some way off. The Havas negotiations had pretty much established the benchmarks for a deal; Sorrell was able to exploit them. Did he overpay? CHI was never going to be cheap, whoever bought it, given the quality of the operation. There is only one other independent star agency out there at the moment, Mother.
More to the point, will the future relationship work? Sorrell seems very mindful of the mistakes of the past. This is no HHCL deal mark 2 in the making. CHI is still a premium business in the ascendant, with plenty of potential to expand internationally. Moreover, the safeguards guaranteeing its independence seem genuine enough.
Ultimately, though, it’s all about how the chemistry works. Isn’t it?