Is the imminent 80% capital gains tax hike spurring on the sale of agencies?

Alistair%20Darling%2C%20Engine%20GroupA wave of agency sell-offs is sweeping UK marketing services as advertising bosses race to beat the 80% capital gains tax (CGT) hike which kicks in this April.

Last week, Engine Group bought direct marketing agency Partners Andrews Aldridge in a deal rumoured to be worth £18m. Earlier this month, communications planning agency Naked was sold to Photon for £16.5m upfront and in January Havas acquired media agency BLM for £20m.

Owners of independent agencies stand to pay hundreds of thousands of pounds in extra tax if they fail to sell their businesses before the end of March.

Engine chief executive Peter Scott denies that the upcoming CGT hike hastened the Andrews Aldridge deal. He says talks had started well before the rise was announced by Chancellor Alistair Darling in last October’s pre-Budget statement.

But Scott adds: “The rest of the market is looking at the tax changes and calling for March completion on sell-offs. You’ll see a lot more deals before then. But it will be as quiet as a mouse from April 6 onwards.”

Darling’s new rules “simplify” CGT. At present, entrepreneurs who have owned a stake in their businesses for more than two years pay as little as 10% tax on their gains, while others pay 40%. From April, there will be a single rate of 18%.

Sell-off predictions

After October’s announcement, Naked chief executive Nigel Long rushed out a memorandum alerting the agency’s six partners to the tax hike and indicating that the pressure was on to strike a deal before the April cut-off date. At the time, Marketing Week predicted a wave of sell-offs as agency start-ups looked for a speedy exit (MW.co.uk October 12, 2007).

Long says: “The CGT rise was a factor for the founding partners and provided another reason to take approaches seriously. We engaged in talks in November rather than letting them drag on into January or February. Anybody contemplating a deal would be looking to get it done to a tighter time scale than normal. I’m sure there are people burning the midnight oil to get their deals away.”

Long was a non-executive at Partner Andrews Aldridge before its sale to Engine and says the tax deadline was a motivating factor in last week’s deal.

Additional factors

However, there are other causes adding to the flurry of acquisition activity. Keith Hunt, managing partner at corporate financiers Results International, says: “There have been other drivers. Last year was busy and we did 18 deals, twice the number on the previous year, as people sold up after five years of solid growth in marketing services. There is an element of getting out while the going is good. People wonder how long the good times will last and see choppy waters ahead.” But he adds that there are no signs of a downturn in marketing services.

One deal Results has helped ink in recent weeks is digital specialist Mason Zimbler’s sale to US operation Harte-Hanks.

Speculation is rife about other deals likely to emerge before the end of March. There are rumours that shareholders at digital agency i-Level are looking to cash in their chips, though the agency denies this. Meanwhile, direct marketing agency Archibald Ingall Stretton managing partner Stuart Archibald declines to comment on whether any marketing services groups have approached the company. But he denies it is up for sale. Rapier also denies a deal is imminent. Another direct marketing operation, Kitcatt Nohr Alexander Shaw, is also in the frame as a buy-out target

For those looking at a deal, to miss the April deadline would be costly. But it could turn out far more costly for all concerned if inappropriate deals are struck quickly solely to save agency entrepreneurs a few hundred thousand pounds.

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